Situation in manufacturing below expectations
PMI for Polish manufacturing fell from 43.5 pts in July to 43.1 pts in August, well below the market consensus (44.1 pts) and our forecast (44.0 pts). This means that the index has remained below the 50-point level separating growth from contraction for 16 consecutive months. At the same time, the rate of decline in activity in August was the strongest since October 2022. Lower contributions from 4 out of 5 components (for current output, new orders, employment and delivery times) had a downward effect on the index, while a higher contribution from the inventories component had the opposite effect.
Weakening domestic demand causes accelerated decline in new orders
Particularly noteworthy in the data is the further reduction in the component for new orders, whose decline reached its highest rate since October 2022. It is worth noting that, at the same time, the index for new export orders increased, although it remains clearly below the 50-point level. This suggests that the reason for the acceleration of the decline in total new orders was the further weakening of domestic demand. At the same time, given the strong downturn recorded in the Eurozone in August, we do not believe that the increase in the index for new export orders indicates an improvement in the outlook for foreign demand.
Decline in current output limited by realisation of production backlogs
In an environment of a declining stream of new orders, a deepening decline in current output is visible, which in August fell at the highest rate since November 2022. Businesses are trying to compensate for lower orders by realising production backlogs, which in August fell for the 15th consecutive month. In an environment of weakening demand, businesses also increased the rate of reduction in purchases of intermediate goods and stocks of final goods in August.
Disinflationary processes in manufacturing persist
Weakening activity in manufacturing is also reflected in the continued strong decline in both input and output prices, with its rate declining slightly in August. This is consistent with our scenario of a gradual weakening of inflationary pressures in Poland in the following months.
Accelerating restructuring processes in manufacturingAlso noteworthy in the data is the further decline in the index for expected production at a 12-month horizon, which, although still above the 50-point level, was at its lowest level since December 2022 in August. The deteriorating expectations of businesses are reflected in the acceleration of restructuring processes. What supports this assessment is a further decline in the manufacturing employment component of the PMI, the rate of which in August was the highest since November 2022.
Downside risk to our GDP forecast
Today’s business survey results, in particular the strong deceleration in order inflows, pose a significant downside risk to our forecast for economic growth in Poland in Q3 and Q4 2023. We will present our revised macroeconomic scenario in Monday’s MACROmap.
In our opinion, today’s data is slightly negative for the PLN and yields on Polish bonds.
