Industrial production fell 1.2% year-on-year in February, following a 1.8% YoY increase in January. Production growth in mining (+3.5% YoY) was accompanied by declines in other areas. In manufacturing, output shrank by 0.9% YoY with deep (more than 20% YoY) declines in metals and chemicals production. Production related to the automotive industry and electrical equipment (including batteries for electric vehicles) continued to grow, supported by better-functioning global value chains and a high backlog of orders in the automotive sector. However, this will not prevent a generalized sales and growth slow down.
Despite signs of stabilization in the manufacturing sector, production activity is stabilizing at a relatively low level, and in the first quarter, industrial value added is likely to be at a lower level than in the same period last year. Combined with the weakness in trade, this will translate into an annualized decline in GDP in the first quarter of this year. ING currently estimates this at around 1%.
In February, employment in the business sector increased by just 0.8% YoY, weaker than a month ago (1.1%). On a sequential month-on-month basis, employment dropped by about 4,000 full-time equivalents, which goes against the seasonal growth trend and was a negative surprise.
Manufacturing employment continues to decelerate (22,000 jobs were lost from the peak in April 2022 to February), with furniture and textile manufacturing, among others, continuing to perform very poorly. However, service industries remain strong, especially information and communication, which hit new employment records. The strong condition of services is likely in part the result of the further relocation of the business to Poland from neighboring countries in the East. Industrial companies are most likely adjusting capacity to weakening demand, given weak household spending, among other factors, and the collapse in the housing market, which is spilling over to related industries.
Average wages in the business sector rose as much as 13.6% YoY, similar to January’s (13.5%). Wage pressures remain strong, both due to the tight labor market in some industries and the historically high minimum wage hike from January (by 15.9%). However, wage growth continues to lag behind inflation (18.4% YoY in February) uninterrupted since July 2022. As a result, analysts see a loss of real household purchasing power. In addition to weak sentiment (e.g. planned purchases of durable goods), this had a decisive impact on the deceleration of consumer spending in the fourth quarter and most likely in the first as well.
In February, retail sales of goods fell by 5.0% year-on-year. Retail sales data clearly show that elevated inflation is putting downward pressure on households’ real disposable incomes and purchasing power. Most of the weak sales of durable goods last year were alongside rising purchases of necessities (food, pharmaceuticals, clothing, and footwear). Consumers seem to be trimming their purchases of essential goods.
The overall picture that emerges from the data is unfavorable. The magnitude of the cost shock has been such that companies are still continuing to raise prices (this is shown by core CPI inflation and producer price inflation PPI for January-February). At the same time, data from the labor market shows that companies are starting to adjust to the economic slowdown through employment because the pace of wages is de facto determined by the strong increase in the minimum wage and inflation expectations. As a result, the pace of expected disinflation may be slow, supporting the concern about persistently high core inflation.