Strong deterioration in Polish manufacturing

The PMI index for Polish manufacturing decreased to 47.6 pts in December vs. 49.5 pts in November, which was markedly below the market consensus (49.8 pts) and our forecast (49.5 pts). It was also its lowest level since April 2013. Thus, December was the second consecutive month in which the PMI index was below the 50-pts threshold, dividing expansion from contraction of activity. The decrease in the PMI index resulted from lower contributions of 3 out of 5 its components (for new orders, current output and inventories). The higher contribution of components for employment and delivery times had the opposite effect.

New orders have been falling the most since June 2009

Especially noteworthy in the data structure is the strongest since June 2009 decline in total new orders. New export orders have also decreased. It is worth noting that the component for total new orders has been below the component for new export orders for the first time since July 2017. This means that domestic orders have fallen more strongly than foreign orders. This in turn indicates that the decline in total orders in Polish manufacturing resulted not only from the weakening of external demand, but also internal demand. In our opinion, this was mainly related to supply constraints (lack of skilled labour). In December further deterioration in manufacturing was also recorded in the Eurozone (including Germany and France) and China, which is related to the slowdown in global trade, as well as the downturn in the automotive industry (see MACROmap of 19/11/2018). Consequently, we expect that in Q1 2019 the drop in new export orders in Polish manufacturing will continue.

The production backlogs buffer has run out

In the conditions of a drop in new orders, companies in previous months have been catching up with their production backlogs. As a result, the component for current output had been remaining above the 50 threshold, while the component for the production backlogs had been recording strong declines. However, current output in manufacturing has been decreasing for two months, and in December the rate of its decline was the fastest since June 2009. This indicates that the buffer in the form of production backlogs has run out, and in the following months there is a high probability that the drop in current output will continue (see MACROmap from 03/12/2018).

GDP growth clearly slowed down in Q4 2018

Today's weaker-than-expected results of business climate surveys in Polish manufacturing are slightly negative for the PLN and yields on Polish bonds. At the same time, they are consistent with our forecast of industrial output growth in December (3.2% YoY vs. 4.7% in November). In Q4 2018, the average value of the index was 49.2 pts vs. 51.6 pts in Q3, which supports our forecast of Polish GDP growth in Q4 2018 (4.5% YoY vs. 5.1% in Q3).

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