July industrial output surprised to the downside in Poland, amid declines in export-oriented industries linked to the German automotive sector. At the same time the Polish labour market softens but remains firm, ING commented on August 21.

Despite a softer start to the third quarter, ING still sees 3% GDP growth in 2024 as strong consumption compensates for weak exports and investment.

In July, average wages in Poland’s corporate sector rose by 10.6% y/y, while employment contraction remained muted (-0.4% y/y). The mix of demographics, migration and minimum wage hikes should yield high wage growth in 2025, possibly resulting in a further decline in corporate profit margins in manufacturing and construction.

Polish industrial production rose by 4.9% y/y in July (below consensus of 7.3%), after stagnating (0.0% y/y) in June, a downward revision from +0.3% y/y. Weakness in demand for Polish manufacturing products dominated the positive calendar effect (July 2024 had two more working days than July 2023).

Output in manufacturing increased by 5.0% y/y after -0.1% y/y in June, while mining output increased by 2.3% y/y (after -2.6% y/y in the previous month). Power generation increased by 1.6% y/y,  and water supply, sewage and waste collection increased by 10.3% y/y (after 3.9% y/y a month earlier). Seasonally adjusted data points to a 0.2% month-on-month decline in the overall industrial production in July, ING says.

 

The largest increases in production were recorded in the manufacture of wood products (+21.0% y/y), furniture (+14.5% y/y) and paper products (13.9% y/y). In contrast, the deepest declines were reported in the manufacture of electrical equipment, including batteries for electric cars (-18.7% y/y) and motor vehicles, trailers and semi-trailers (-9.1% y/y). The low production levels were observed in export-oriented automotive-related industries, which ING linked to the weakness of the German car market and the withdrawal of government subsidies for the purchase of electric cars in Germany since the beginning of this year.

July brought a further reduction in producer price deflation (PPI). The PPI index fell by 4.8% y/y in July, following a decline of 5.8% y/y in June (after an upward revision from -6.1%). In manufacturing, prices fell by 3.9% y/y, in mining by 4.0% y/y, in power generation by 12.8% y/y, and prices related to water supply, sewage and waste collection rose by 3.8% y/y. Compared to June, producer price levels were unchanged, confirming the stabilisation of the PPI index in recent months.

“The domestic manufacturing industry is struggling with an unfavourable external environment. Growth in the euro area is weak and the German automotive market, which is important for Polish manufacturers, is experiencing serious problems. At the same time, there are reports of a fading economy in China and an economic slowdown in the US,” ING said in a note. “Under such conditions, the recovery of Polish industry is progressing slowly. However, the start of the third quarter is proving difficult for Polish industry.”

In the second quarter of this year, industrial production increased by 0.9% y/y, following declines in the previous five quarters on an annual basis.

The decline in the production of capital goods (-1.7% y/y) is worrying, while the production of consumer durables increased solidly (+12.7% y/y). This confirms that GDP growth will be based on consumption, with visible weakness in exports and investment.

“Our 2024 economic growth forecast remains at 3% and the better-than-expected second quarter result (+3.2% y/y) mitigates the downside risks signalled earlier for Poland's full-year 2024 GDP growth forecast – even when taking the third quarter's weaker start into account,” ING said.

Polish wage growth came virtually in line with ING’s forecast of 10.5% y/y, slightly below consensus (11.0%) but slower than in June (11.3%).

Wage dynamics are gradually decelerating, although this is mainly due to smaller bonus payments in the mining and energy sectors (2023 saw a high statistical base as it was an election year). In general, the high wage dynamics in July, especially in manufacturing and construction, were instead supported by two more working days than in 2023 and another increase in the minimum wage from July.

The worsening condition of the labour market is clear in the employment data. In July, as expected, this fell by 0.4% y/y following a 0.4% y/y drop in June.

Manufacturing industries are doing relatively poorly, struggling with weak economic conditions in the eurozone (especially in Germany) and strong competition from Asia.

However, the scale of the deterioration remains quite small (Poland, for example, has the second lowest unemployment rate in the EU, after the Czech Republic) due to the demographic situation and the outflow of migrants from Ukraine. In such an environment, companies are still very reluctant to cut jobs, fearing difficulties with finding employees when the economy improves.

A gradual economic rebound, demographics and a significant increase in the minimum wage in 2025 suggest that wage growth will remain strong next year as well, although it will no longer be in double digits. Growth in consumer spending should remain a key driver of economic growth. However, high growth in labour costs is set to translate into a risk of further compression of corporate margins, especially in manufacturing and construction.