Economic news

• INTEREST RATES: According to Ludwik Kotecki, there is still room for monetary easing this year, 25 or 50 bps, depending on the upcoming data. This lines up with both our forecast and market pricing. Kotecki, however, remains hawkish in his comments on the terminal rate. He sees it at 3.75-4.00%, above the typical assumption of 3.00-3.50%.
• LABOR MARKET: Yet another atypical unemployment rate print. The preliminary estimate from the Ministry of Family, Labor and Social Polish showed that unemployment rate rose from 5.2 in June to 5.4% in July – not what forecasts and seasonal patterns called for. However, it is very likely that unemployment is still rising due to regulatory factors, the scale of the adjustment has always been uncertain. The growth rate of average gross monthly salary in the national economy (PLN 8,748.63) slowed down in the second quarter to 8.8% yoy from 10% in the previous quarter. That indicates that wage pressure is also decreasing outside the monthly-monitored enterprise sector.
• DEBT: The Ministry of Finance sold PLN 13.9 bn of POLGBs during last week’s auction (that figure includes the supplementary sale on the same day). This is likely the biggest PLN bond sale in history and at the same time the last delivery of fresh bonds to the market before September.
• GOVERNMENT POLICY: The Minister of Finance unveiled a new type of savings account (Personal Savings Account, in Polish – OKI). The proceeds from the account will be exempt from capital gains tax, but balances exceeding PLN 100k (EUR 25k) will be subject to an asset tax, whose rate depends on the risk-free rate and the capital gains tax rate (hence, 0.8-0.9%). We assume that the new product will draw some assets from other investment and savings accounts, but will not materially change the investment & savings landscape. Assets under management in existing schemes are probably a good benchmark (~10 bn PLN).

Can we still trust the PMI? 

Both the media and analyst community attach great importance to monthly readings of the PMI – survey-based indicator reflecting sentiment in the manufacturing and services sectors. Its undoubted advantage is its international reach: surveys are conducted not only in European countries, but also in the largest non-European economies. This makes the PMI a valuable and timely tool for comparing the economic situation in different parts of the world.

However, something stopped adding up recently...
Strange things have been happening in recent months with the PMI readings for Poland. Since May, the PMI index has fallen sharply, quickly dropping below the 50-point mark – the threshold separating expansion from recession in the industrial sector. What is more, in July, Poland recorded the lowest reading in the entire EU, whereas upward surprises and growth have recently dominated. What is the reason for this? It is difficult to say unequivocally. Perhaps it is a reaction to the uncertainty surrounding US trade policy – but why would Polish companies react more strongly than, for example, German or Czech companies? More importantly, there is no sign of an equally strong slowdown in real economy data on industrial production. This is surprising because, in theory, the PMI should signal changes in industrial activity with some short-term lead, yet this relationship seems to be weakening. It is not the first time we are voicing our concerns. It is a good opportunity for a more detailed investigation.
 

Poland manufacturing PMI compared to industrial output growth (3MMA)
  

Source: Markit, Statistics Poland, Pekao Research
 

Our study: the relationship between PMI and industrial production
To examine how the relationship between PMI and industrial production growth has changed over time, we conducted a statistical analysis comparing the correlation coefficient between the PMI index and annual industrial production growth in a rolling 24-month time window. In practice, for each month, we checked how strong the relationship between annual production growth and the PMI level was over the last 24 months. The study covered not only Poland, but also a number of other economies (including EU countries, the UK, Turkey, the US, Japan, and South Korea).
Interestingly, although the authors of the PMI recommend interpreting it on a monthly basis (month-on-month growth, seasonally adjusted), we obtain the highest correlation with the annual growth rate (year-on-year) of industrial production. In our analysis, we additionally averaged the data – both for the PMI and production – into 3-month moving averages to mitigate the impact of delayed effects or high volatility of the PMI index.

Rolling window correlation between PMI and industrial production growth
  

Source: Markit, Statistics Poland, Pekao Research

Over the longer term, the relationship between the indicators was clear and positive. The correlation in most countries remained at a long-term average of 0.4. The COVID-19 pandemic further strengthened this link—both indicators reacted clearly and almost synchronously, showing a sharp economic downturn in the spring of 2020 and a dynamic rebound in the following months. This is not surprising – in times of severe economic shocks, sentiment and hard data often move clearly in the same direction. What is more interesting, however, is what happened next. From that point on, the correlation between PMI readings and industrial production declined steadily, both for Poland and other countries. By the end of 2023, the correlation coefficient had fallen to almost zero, meaning that the PMI had lost its predictive value. A similar situation did occur temporarily in 2016–2017, but the current trend appears to be more lasting. This is a serious warning to analysts and commentators who treat PMI as one of the main sources of information on the state of industry. In summary, the usefulness of the PMI in forecasting industrial production has greatly diminished.
PMI is not the only indicator of economic conditions in Polish industry. A similar survey, but with a broader scope and a larger sample, is conducted monthly by, for example, the Central Statistical Office (GUS). In order to bring the GUS economic indicators closer to the PMI, we calculated a kind of synthetic PMI – we took those GUS indices that map directly onto the PMI components (orders, employment, production) and weighted them like the PMI survey does its components. In the last step, we calculated a standardized version of both so that the historical average for the PMI and GUS was zero. It turns out that, first of all, we find no confirmation here of the economic downturn reported in the PMI in recent months. Secondly, we found no basis for believing that the PMI survey is closer to hard data on industrial production. Thirdly, the PMI index is characterized by greater volatility, introducing unnecessary confusion with one-off fluctuations. This is all the more so because the PMI index is the most media-friendly economic indicator and its readings easily shape sentiment – sometimes without being supported by data.

Industrial confidence indices for Poland (standardized scale)
 

Source: Markit, Statistics Poland, Pekao Research
 

Financial market update

The zloty strengthened on Friday, with EUR/PLN easing from 4,255 to 4,245, a move largely reflecting the dollar softening rather than domestic momentum, while emerging-market assets drew support from a broader rise in global risk appetite on geopolitical headlines – particularly the announcement of the upcoming Trump-Putin meeting and possible armistice in Ukraine. In fixed income, Polish sovereign yields eased marginally, the 10-year remaining confined to a 5,35-5,50% band, as equity markets extended gains, with the WIG20 breaking above 3,000 for the first time since 2008 and the broad WIG reaching record territory. The absence of major macro catalysts in the coming days points to near-term stability, though attention is shifting to Wednesday’s preliminary Q2 GDP release. With our forecast of 3.5% yoy growth (against 3,4% consensus), the data could act as a fresh tailwind for the currency and push POLGBs, government bond yields, lower.