PMI rose, but still looks weak. What about other data?

The July PMI reading of 45.9 points is better than June's (44.8 points) and broke the downward trend that had been ongoing since April. However, it's difficult to see the new data as optimistic. The PMI is still well below the 50-point threshold that separates recovery from contraction in the sector. The 45.9-point reading is the second-worst in the past twelve months, behind June's.

PMI still weak, export orders at lowest in two years

S&P Global data shows that the volume of new orders for Polish manufacturers declined in July for the fourth consecutive month. The underlying causes of weak demand remain unchanged: international markets, particularly Germany. In fact, new export orders fell in July by the most since August 2023.

According to S&P Global analysis, the continued sharp decline in new orders was reflected in lower production and employment. Manufacturers also reduced demand for raw materials and semi-finished products in July, with purchases of inputs falling the most since October 2023. S&P Global data also indicate a moderate pace of growth in average production costs. Notably, manufacturers also lowered the prices of their finished goods in July.

After a period of considerable optimism around March – before the uncertainty surrounding the tariff war, when many companies increased orders to get ahead of the tariff hike – production forecasts for the next 12 months are now much weaker. While they improved somewhat in July (S&P Global reports greater optimism about new markets, investments, and raw material supply), this was an improvement from near-pandemic lows. "Optimism was significantly weaker than the trend observed since 2012. Competition from Asia, in addition to US tariffs, was cited as a threat to sales," the study noted.

“However, the July data suggests at least that the worst of the current economic slowdown may have passed, as declines in production, new orders and employment have eased and the outlook for the next 12 months has improved,” said Trevor Balchin, economic director at S&P Global Market Intelligence.

Inflation surprised to the upside

Friday's PMI data were no surprise, unlike the rapid July inflation reading released by the Central Statistical Office on Thursday. Annual price growth fell to 3.1% year-on-year, somewhat disappointing compared to the average forecast (2.9%). On the other hand, this is the lowest reading since June 2024, and the first time since then that it has fluctuated around the National Bank of Poland's inflation target (2.5% +/- 1 percentage point).

"However, it's impossible to speak of success in bringing inflation back to the target. The goal is set on price stability, not on balancing strong increases in some products (partly food) with declines in others. The prices of services will continue to have the strongest impact on inflation," says Mariusz Zielonka, chief economist at the Lewiatan Confederation.

Real wage growth over 5 percent

Will the next economic data due in August bring any surprises? According to the average forecast by economists for "Parkiet," retail sales grew by 3.2% in July, stronger than in June (+2.2%). The sales trend is positive this year: in the entire first half of the year, they grew by 3.7% in real terms compared to the same period in 2024. Economists attribute this to, among other things, solid real wage growth (over 5% year-on-year in the second quarter), interest rate cuts , and improved consumer sentiment. Moreover, the coming months do not seem to threaten the positive outlook. The decline in inflation near 3%, combined with the average increase in average wages in the corporate sector in July forecasted by economists at 8.7%, means real wage growth of around 5%.

The lower average wage growth rate than last year is the result of a smaller minimum wage increase, but also a cooler labor market. Economists predict that average employment in the corporate sector fell by 0.8% year-on-year in July, which would translate to a year-on-year loss of approximately 50,000 full-time positions. This may also be partially due to lower labor supply and changes in the structure of the surveyed companies at the beginning of the year, but analyses by companies like Grant Thornton and the National Bank of Poland (NBP) suggest lower demand for employees. Based on data from the NBP's "Fast Monitoring," it can be concluded that the two main reasons for this are weaker-than-expected demand for corporate goods and services, as well as labor costs. "The labor market is more balanced in terms of supply and demand, at least on a macroeconomic scale," comments Marta Petka-Zagajewska, director of the PKO BP Macroeconomic Analysis Bureau.

The unemployment rate in July, according to economists' average forecast, was 5.2%, the same as in June and higher than in July 2024 (5%). The higher unemployment rate than a year ago is primarily the result of legal changes. Among other things, it is now possible to register with the employment office by place of residence and to register farmers as unemployed. Economists at Santander Bank Polska add that unemployed individuals currently do not receive monthly calls to the office to confirm their availability for work, but will be removed from the register only after three months.

What will GDP data show?

Construction and assembly production, according to the average forecast, grew by 1.3% year-on-year in July, following a 2.2% increase in June. "Specialized works have already rebounded significantly, and we interpret this as a signal that the coming months will bring a recovery in civil engineering. This is consistent with the fact that while 35% of the KPO funds have already reached Poland, only 10% have reached the final beneficiaries. This money should be "revealed" in the economy soon," comments Petka-Zagajewska. With the increase in mortgage demand (the result of interest rate cuts), we should also see improved statistics in the residential construction segment in the coming months. Industrial production grew by 1.9% year-on-year in July, according to economists' average forecast, after a disappointing reading of -0.1% in June. Here, in recent months, positive signals have been intertwined with negative ones, and it seems that without strong signals of a recovery in demand from the euro zone, little can change.

In mid-August, we'll get a flash estimate of GDP for the second quarter. The average of economists' forecasts for "Parkiet" indicates that the Polish economy grew by 3.3% year-on-year, slightly stronger than in the first quarter (3.2%) . Detailed data will be released on September 1st, but analysts expect that Poland's second-quarter growth was driven by factors including solid private consumption (average forecast +3.5% year-on-year) and solid data on fixed capital formation. While the average forecast (+4.8% year-on-year) is lower than the first quarter's result (+6.3%), it's very possible that the accounting for defense investments had a strong impact on the reading from the beginning of the year. "In a broader sense, the economy should accelerate slightly, supported by an improvement in investment, as indicated by, among other things, a revival in corporate lending," comments Jakub Szczepaniec, economist at Alior Bank.