Further deceleration in Polish manufacturing

Polish manufacturing PMI dropped to 47.4 pts in July vs 48.4 pts in June, running below the market consensus equal to our forecast (48.0pts). Thus, the index has now for nine months in a row been running below the 50 pts threshold dividing expansion from contraction of activity. In July the index value reached its lowest level since April 2013. The index decrease resulted from lower contributions of three of its five sub-indices (employment, stocks of goods purchases and suppliers’ delivery times). Higher contribution of the sub-indexes for output and for new orders had an opposite impact.

Polish manufacturing is driving on fumes

Especially noteworthy in the structure of the July PMI is the decrease in new export orders, which has continued for twelve months and was more pronunced in July than in June. It was largely caused by the sharp slowdown observed in recent months in global trade growth and the resulting decrease in manufacturing activity in the Eurozone, and in Germany in particular (see MACROmap of 29.07.2019). The negative impact of the deterioration of the situation in the Eurozone and Germany is also observable in the decrease of July PMIs for other countries in the region – Czech Republic and Hungary.

Surprisingly, even though the foreign demand is weakening, July recorded a slower decline of output in Polish manufacturing. It was possible due to the fulfillment of the outstanding orders by the companies. The pace of decline of production backlogs in July was the fastest since November 2012.

In July the first decrease in the inventories of stocks purchased since April 2013 was recorded. Companies’ limited tendencies to increase stocks might signalize their pessimistic expectations concerning demand in coming months. These expectations were also reflected by a decrease of the Indicator of Future Output Index (in the next 12 months) to the lowest level since October 2012. Additionally, June recorded subsequent increase in the sub-index for stocks of finished goods. Combined with further fast decline in production backlogs and lower indicator reflecting the expectations concerning production in a yearly horizon, this signals that the increase in stocks resulted from the surprisingly sharp decline in demand.

Is this the end of the resilient manufacturing in Poland?

In recent months we have observed continuing resilience of Polish manufacturing to the slowdown of manufacturing activity in the Eurozone. This resilience was signaled by the deepening in recent months difference between the PMI readings and the hard data on industrial production. However, we believe that July may have been a breakthrough month in this respect and the weakening of external demand will be more pronounced in the July data than in previous months. However, it's worth emphasizing that slower growth of industrial production has been taken into account in our forecast of GDP growth in 2019. Thus, today's reading supports our forecast of GDP increase in whole 2019 (4.4% YoY vs 5.1% in 2018.).

Today's business survey results for Polish manufacturing are slightly negative for PLN and yields on Polish bonds

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