Poland: Resilient does not mean isolated

Polish PMI manufacturing dropped to 48.9 in May from 49.2 in April. The drop was weaker than expected (consensus and Nordea forecast was 48.5) and weaker than for the Euro-area or regional peers, which confirms the Polish economy remains quite resilient to negative external developments.

However, when digging into details of the PMI report, one can see further economic slowdown on the horizon, the same as in details of GDP figures for Q1 released yesterday (see here). While domestic new orders rebounded a bit, the sub-index for new export orders fell again further below neutral level of 50.0 and reached the lowest level since June 2009. Resilient does not mean isolated.

While Poland will most likely remain growth outperformer within the EU, it is slowing down and it is going to be a long way down with GDP growth decelerating for at least the next three quarters, to below 3% in the second half of this year.

Weakening growth will challenge the finance ministry’s efforts to continue fiscal consolidation, but in our baseline scenario for GDP growth we assume the government will succeed to reduce general government deficit to 3% of GDP this year.

In my view the scale of economic slowdown will be a surprise for some of Polish central bankers. Many of them have expected Poland will experience virtually no slowdown this year, so weak numbers for next quarters may change their view on optimal monetary policy settings. Thus, I believe that rate hike in May was a single move and policy tightening will not be continued.

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