Polish industrial production still weak, but with first green shoots

Industrial production fell in August by 2.0% YoY, below the consensus of -1.7% but slightly above our forecast of -2.5%. At the same time, the CSO revised upwards the data for July from -2.7% YoY to -2.3%, suggesting some stabilisation at a reduced level. On a seasonally-adjusted basis, August's industrial production was 0.6% month-on-month higher than in July, and this is one of the few optimistic signs from the data reading.

The majority of industry sectors continued to contract, but some saw growth. The deepest decline was recorded in the production of supply goods (-7.8% YoY), with decreases also recorded in the production of consumer goods (durables -6.4% and non-durables -0.9%), while the production of capital goods rose solidly (+10.5%).

Also when looking closer, the deepest YoY declines were recorded in coal and lignite mining (-19.9%), metal production (-17.9%), and also in paper production (-12.3%), computers and electronics (-12.2%) and electrical equipment (-7.3%). For most of these industries, the base from last year was high. On the opposite side, solid increases were recorded in machinery and equipment repair (+22.0%), clothing (16.2%), other transport equipment (15.3%), motor vehicles (14%) and machinery and equipment (9.9%).

Export-oriented industries are recording both declines (computers and electronics and electrical appliances) and increases (manufacturing, motor vehicles and other transport equipment). The latter is a positive sign in light of the weak economic situation in the euro area, particularly in Germany.

The PMI shows Poland is experiencing the third longest period of falling orders since 1998. The weakness in industry is due to meagre domestic demand. The main engine of growth of recent years, i.e. consumption, has stalled and is failing to take off despite falling CPI, wage increases and even better sentiment. The industrial data also shows a weak performance in construction.

The recent balance of payments data shows that exports are also weakening, although the latest PMI shows less pessimism in foreign orders. The third quarter could see a further decline in GDP in YoY terms. By contrast, today's data suggests a continuation of the solid investment growth seen in the first half of this year.

However, there are initial signs of improvement in global manufacturing, seen in data from Asian exporters and even more recently from China. Poland will feel the signs of a rebound in Asia with a long delay because of the stagnation in the German economy.