Industrial production growth markedly below expectations

In accordance with the Polish Central Statistical Office's (GUS) data, the dynamics of sold production of industry in enterprises employing more than 9 people dropped to -2.7% YoY in June vs. 7.7% in May, running significantly below our forecast equal to the market consensus (2.0%). The sharp decrease in the annual dynamics of industrial production in June compared to May resulted from the statistical effect in the form of an unfavourable difference in the number of working days (in May the number of working days was 1 day higher from 2018 while in June 2019 it was lower by 2 days than the year before). Seasonally-adjusted industrial production decreased by 2.0% MoM in June.

Production decline is wide ranging yet export branches fare surprisingly well

According to the GUS statement, production decline was recorded in 76.0% branches of industry (measured by their production value). This percentage indicates that the contraction of industrial activity was wide ranging. In our view the error of our forecast resulted mostly from the underestimation of the unfavorable impact of calendar effects. The negative impact of the record high air temperatures recorded in June resulting i.a. in lower productivity and shorter working times may also have been stronger than we had expected.

It is worth noting that industries which recorded positive annual production dynamics in June included branches with a large percentage of exports in sales: "other transport equipment” (11.1% YoY), "computers, electrical and optical products” (3.5%), and “electrical equipment” (2.7%). This situation is consistent with the June business survey results for Germany and the Eurozone (PMI) which pointed to weaker recession tendencies in manufacturing in countries being Poland’s main trading partners. Production dynamics in the category “vehicles, trailers and semi-trailers” have visibly decreased to -8.5% YoY in June from 12.6% in May. The surprising (against the backdrop of other export branches) deterioration in this branch results most probably from weaker demand for cars in the European Union. The number of new cars registered in the EU decreased by 7.8% YoY in June vs. a 0.1% increase in May.

The outlook for Q3 is still optimistic

We believe that as the negative effects abate, the dynamics of industrial production in Poland will markedly increase again in July. Our view is consistent with the results of the quarterly business survey of the NBP (Quick Monitoring). An increase in the indicator of total demand forecasts for Q3 was recorded among non-exporters and non-specilaized exporters. On the other hand, specialized exporters forecast a slight deterioration of the demand outlook for Q3 2019. In our view, the biggest risk to the outlook for industrial production growth in the coming months remains the situation in global trade.

A downside risk to our forecast of economic growth

Today’s data on June industrial production in Poland pose a downside risk to our forecast for GDP growth in Q2 2019 (5.0% YoY) and in the entire 2019 (4.7%). We will present our revised medium-term macroeconomic scenario after seeing the June data on construction-assembly production and retail sales.

Data on industrial production in June are slightly negative for PLN and bond yields.

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