Poland’s manufacturing PMI fell to 48.5 pts in May from 52.4 pts in April, running slightly below the market consensus consistent with our forecast (52.0 pts). Thus, the index stood under the 50-point threshold, which separates expansion from contraction, for the first time since June 2020. According to the PMI survey, the sentiment in Polish manufacturing was at the lowest level since the first wave of the COVID-19 pandemic.

Marked decline in current output and orders

The index fell primarily on the back of lower values of components for total new orders and output. Together, the components drove the PMI down by 3.2 pts between April and May. Though the drop in orders was already recorded in March and April, it was much more pronounced in May. According to the PMI report, the lower inflow of orders was related to market instability spurred by the war in Ukraine and high inflation. Interestingly, the data structure shows that May primarily saw a weakening of domestic demand, while the decline in foreign orders slightly decelerated. The surveyed businesses pointed out that diminished foreign demand was observed in the case of key EU economies. We believe that the weakening of domestic demand could have been related to lower activity in construction. Output was hampered by weaker demand and continued supply and logistical constraints. As a result, in May it contracted the most since May 2020.

End of growth of stocks?

The stocks of purchases increased in May for the 14th month running. However, it is worth noting that purchases of materials significantly slowed down, marking a reversal of the trend observed in the last dozen months or so. Moreover, May saw an acceleration in the drop of stocks of finished goods. Such signals (although requiring confirmation in the coming months) support our assessment expressed in the commentary on GDP data released yesterday (see MAKROpulse of 31/05/2022). We forecast that the high contribution of the increase in inventories to GDP growth recorded in Q2 will not be maintained in the coming quarters, which will be conducive to a marked slowdown in industrial production and GDP growth.

Polish manufacturing set for soft landing

May saw a drop in the index for output expected over a 12-month horizon, which is hovering around levels seen in 2020, i.e. a period marked by severe disruptions in global supply chains caused by the pandemic, which had an adverse impact on activity in manufacturing and the prospects for recovery. However, the index still stands at well above 50 pts, which supports our scenario predicting that the coming quarters will see a soft landing of the Polish economy. This means that the slowdown in GDP growth in 2022 will not be significant. Our revised macroeconomic scenario, accounting for the GDP structure published yesterday and other recent data releases, will be published in the upcoming MACROmap.

We believe that today’s PMI data is slightly negative for the PLN exchange rate and yields on Polish bonds.

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