A slump in industrial production in April

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 -24.6% YoY in April vs. -2.3% in March, running visibly below the market consensus (-10.0%) and our forecast (-18.0%). Seasonally adjusted industrial production decreased by 20.8% MoM, recording the highest rate of decline in the history of the series.

A slump in the production of the export-oriented branches

Like in March, the main reason for the sharp decline in production in April were the broken by the spreading COVID-19 pandemic supply chains which have led to the reduction of production in many plants, in particular those with a relatively large percentage of exports in sales (see MACROpulse of 21/4/2020). Nonetheless, the scale of the decrease in production in April was much bigger than in March. The sharpest production decline was recorded i.a. in the segments: “motor vehicles, trailers and semi-trailers” (-78.9% YoY), “leather and leather products” (-69.4% YoY), “furniture” (-50.4%), “textile products” (-36,9% YoY), and “machinery and equipment” (-34.0% YoY). We estimate that the branches with a relatively large export exposure have lowered the annual dynamics of industrial production between March and April by 11.3 percentage points.

Coronavirus has not spared construction

Noteworthy in the data structure is a marked decline in production dynamics in segments responsible for the supply of raw materials and consumables used in construction projects, i.e. “manufacture of metal products” (-18.6% YoY) and “manufacture of other non-metallic products” (-17.7% YoY). This shows that the construction sector which before had been resilient to the COVID-19 pandemic, was strongly affected by it in April. This has been signaled earlier by the results of GUS business surveys, in which, at the beginning of April, construction companies estimated the decrease in their orders for semi-products, source materials and services at 30.2%.

Branches which initially benefitted from the COVID-19 pandemic are also losing

It is worth noting that most branches of industrial production which initially recorded a visible increase in output, due to a surge in demand for some groups of products during the pandemic, have also recorded a decline in production: “foodstuffs” (-12.7% YoY), “paper and paper products” (-6.4% YoY), and “chemicals, chemical products” (-10.5% YoY). The one exception is the category “pharmaceuticals” (+14.8% YoY) whose production continued to increase although its dynamics have decreased in April compared to March. Thus, the category “pharmaceuticals” has been the only one with positive production dynamics in April.

The pandemic will hit corporate investments

We believe that in the coming months, despite a gradual reconstruction of supply chains, capacity utilization in Polish industry will continue to be relatively low and the return of production to the levels from before the outbreak of the pandemic will be slow. This view is supported by both the results of Polish business survey results and by the released today flash PMIs for the Eurozone, including Germany, which, despite an improvement, have indicated the continuation of a sharp decrease in new orders in German manufacturing. Thus, today’s data, coupled with continuing increased uncertainty about the further spread of the pandemic, strongly support our scenario assuming a double-digit decline in investments in H2 2020. At the same time, today’s data pose a downside risk to our forecast of GDP decrease in 2020 by 3.8%.

Today’s data on industrial production in April are negative for PLN and for yields on Polish bonds. They strongly support our scenario, in which the Monetary Policy Council will cut interest rates to zero at the meeting scheduled for 28 May.

© 2020 Credit Agricole Bank Polska S.A. Wszelkie prawa zastrzeżone.

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