Surprisingly small scale of downturn in Poland’s manufacturing
Poland’s manufacturing PMI rose to 47.3 pts in July from 45.0 pts in June, running well above market expectations (44.9 pts) and our forecast (45.3 pts). Thus, in July the index reached the highest level since February 2023, but remained below the 50-point mark that separates growth from contraction for 27 months in a row. The rise in the index is accounted for by higher contributions from all its five components: employment, new orders, output, inventories, and delivery times.
Businesses are piling up inventories as they fear rising prices
Although each of the PMI components contributed to its rise in July, only two of them (inventories and delivery times) show real growth in activity. According to the press release published with the data, the rise in input inventories, the first since March 2023, and most likely also longer delivery times, were to some extent driven by some businesses’ decision to pile up input inventories in anticipation of price rises. Thus, we believe that the rises in the sub-indices do not actually mean that businesses expect a significant rise in demand in the coming months, which markedly undermines the positive tone of today’s data. Such an assessment is supported by a fall in the index for output expected over a 12-moth horizon, which remains above the 50-point mark, but is below its long-term average. Despite rises in the remaining sub-indices (employment, output, and new orders), they do not exceed the 50-point mark.
New orders continue to decline, but at a slower rate than in previous months
Businesses’ fears of price rises are to some extent reflected in an increase in the input prices component, which was again above the 50-point mark in July. However, it should be noted that in recent months it has been oscillating around 50 points and does not show a sustainable trend. The index for prices of finished goods is systematically lower, which we believe reflects continuing low demand for goods manufactured in Poland. In this context, it is worth noting that the growth of new export orders sub-index was markedly higher than the total orders sub-index. As a consequence, in July, decline in new export orders was the slowest since November 2023. This is somewhat surprising in the light of incoming business survey results from the Eurozone and Germany (see MACROmap of 29/07/2024).
Businesses tend to be more careful about cutting employment
July saw a continuation of restructuring processes in Poland’s manufacturing, with a further drop in employment, which declined for the 26th month in a row. In accordance with the press release, the drop in employment is mainly accounted for by cutting temporary workers and not hiring employees to replace those that retire, rather than actual full-time employment cuts. This is consistent with data that shows a fast decline in the working age population (to be discussed in more detail in the next MACROmap). We believe that the limited scale of full-time employment reductions shows that although businesses are forced to cut expenses by reducing capacity surpluses (see MACROmap of 08/07/2024), they try to keep key personnel to remain competitive and maintain their production capacities.
GDP growth to pick up only slightly
Although today’s data is markedly better than expected, having analysed its breakdown we do not believe it represents an upside risk to our Q3 GDP growth forecast (2.4% YoY vs. 2.3% in Q2; see MACROmap of 29/07/2024). At the same time, we believe the data is neutral for the PLN and yields on Polish bonds.
