Polish industry shows resilience amid the pandemic

March industrial production accelerated by 18.9% from 2.7% year on year in February, beating the consensus of 12.6% YoY and our forecast of 12%YoY.

The robust data partially reflects the low base and the positive difference in one additional working day. However, after seasonal adjustment, industrial production still accelerated by 2.3% month on month from 0.4% a month ago, confirming that the Polish industry and exports increasingly benefitting from the global reopening.

The rapid production growth primarily reflects a sharp acceleration in few sectors: car production (+54.3% YoY), computers (42.3%) and furniture (31.9%), which are all are among top Polish exporters.

The data also reflects the substantial rise of durable consumer goods by 52.1% YoY in March, compared to 13.3% a month ago. Investment goods have caught up too, rising by 26.6% YoY in March, from -3.5% in February, but this mainly reflects base effects.

We see a few reasons behind such a strong dynamics of industrial production:

• Foreign solid demand and exports - Euroland's economy, like Poland's, is becoming more resilient to lockdowns, the process of lifting restrictions in Euroland has already started; additionally, demand from the UK has returned (in January and February, companies and households in the UK used stocks accumulated in 4Q20, before Brexit);
• Households in Poland and abroad are still buying furniture, TV, washing machines as Poland is a hub for these products;
• A restart of automotive industry after stoppages caused by shortages of microprocessors, Polish subcontractors, report very high growth;
• Strong international trade outside Euroland, caused by the earlier opening in the USA and a still a good situation in Asia;
• No surprises about the low base from last year

In March, wage growth in the corporate sector accelerated to 8.0% YoY from 4.5% in February, significantly higher than our and market expectations.

Manufacturing companies that have coped relatively well during the pandemic decided to pay out quarterly bonuses and incentives; the base effect might be at work here. And presumably, some bonuses were postponed at the outset of the pandemic in March 2020. Overtime pay has also been on the rise - accelerating production combined with the growing number of people quarantining in March forced necessary working time adjustments.

In March, wage growth in the corporate sector accelerated to 8.0% YoY from 4.5% in February, significantly higher than our and market expectations

Despite the increase in production, companies have not yet decided to increase employment. Relative to February, jobs in the business sector fell by 0.1% MoM, and in YoY terms, by 1.3%. The consensus expected a 1.2% YoY decline here. In February, employment dropped by 1.7%YoY.

We think the spillover of the third wave of the pandemic has resulted in these jobs cuts in the service industry like hotels, restaurants, retail trade, etc., despite the resilient industry. When the third wave of the pandemic comes to an end, companies in Poland, both in industry and services, should begin to increase jobs again.

A solid increase in wages and other costs (commodities, shipping) has increased pressure on wholesale prices.

Producers price index in March accelerated to 3.9% YoY compared to 2.0% in February. We expected an acceleration, faster than market consensus, but the release surprised us too. This supports our forecast that the rebound of the Polish economy will accompany increasing cost pressures, which should lead to inflation rising above 4.0% YoY.

The robust industrial production numbers call for a 0.9% YoY GDP contraction in 1Q21, much less than the 2.8% YoY seen in 4Q20.

We're waiting for tomorrow's sales and construction figures to calibrate our forecasts better, but for now, we maintain our 4.5% GDP growth forecast for FY21, which we have not slashed despite the third wave of the pandemic.