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Polish Manufacturing Shrank Most in Five Months in March

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April 2 (Bloomberg) -- Poland’s manufacturing contraction deepened in March and the government signaled it may seek a wider budget deficit this year as the economic slowdown saps revenue.

The purchasing managers’ index, a gauge of manufacturing, fell to the lowest since October, undermining chances for a “firm” recovery in 2013, HSBC Holdings Plc said today in an e-mailed statement. Poland’s reputation with investors wouldn’t suffer even if its deficit widened to around 4 percent of economic output, Ludwik Kotecki, the Finance Ministry’s chief economist, told Gazeta Wyborcza in an interview today.

The European Union’s largest eastern economy is seeking to avoid the steepest slowdown in 12 years as demand for its exports from the euro area wanes while rising unemployment curbs consumer spending. The deficit reached 61 percent of the annual target at the end of February and Finance Minister Jacek Rostowski said last week the government is ready to revise the 2013 budget if needed, though the situation wasn’t “critical.”

“The Finance Ministry is preparing investors step-by-step for a higher deficit this year,” Jaroslaw Janecki, chief economist for Poland at Societe Generale SA in Warsaw, said in an e-mailed report.

‘Disappointing Result’

The PMI fell to 48 from 48.9 in February, below the 48.7 median estimate of 23 economists surveyed by Bloomberg. A result above 50 indicates expansion, while a figure below that shows contraction. The pace of manufacturing decline quickened for the first time since September as new orders fell for a 14th month, HSBC said.

“This is a disappointing result that highlights that the bottoming out of the 2012 slowdown continues to be questionable,” Agata Urbanska, an economist for central and eastern Europe at HSBC, said by e-mail.

Poland should find a “reasonable compromise” between the requirement to reduce the so-called “structural” deficit and boosting growth by allowing the nominal gap to widen, Kotecki was quoted as saying by Wyborcza. His comments were confirmed by Wieslawa Drozdz, the ministry’s spokeswoman.

The deficit will probably be raised by around 10 billion zloty ($3.1 billion) from the current 35.6 billion zloty, Piotr Kalisz, chief economist for Poland at Citigroup Inc. in Warsaw, said in an e-mailed note today. He predicts the revision will take place in the middle of the year.

The European Commission estimates that the budget gap narrowed to 3.5 percent of gross domestic product last year from 5 percent in 2011, a level that would probably allow Poland to exit the so-called excessive deficit procedure, Kotecki said. The deficit is expected to reach 3.4 percent this year, according to estimates from the EU’s executive.

Budget Assumption

The government has based its budget on the assumption that the economy will expand by 2.2 percent this year. The central bank projects 1.3 percent growth, the weakest since 2001, and the March PMI was consistent with that estimate, Andrzej Slawinski, head of the Narodowy Bank Polski’s research institute, said today on TVN CNBC.

While Poland has so far avoided the worst of the euro-area crisis, that isn’t “much consolation” as 2013 could prove to be a “most difficult” year for growth, Prime Minister Donald Tusk said at a news conference in Warsaw today. He called for greater cooperation between the government, central bank and financial-market regulator to boost lending to help shield the economy from the debt crisis.

Easing Pause

The central bank has cut interest rates by a total of 150 basis points since November to a record-low of 3.25 percent to boost the economy. They will now pause to gauge the impact of monetary easing, according to a March 6 statement.

Kotecki said policy makers cut borrowing costs “too little, too late.” The inflation rate, which the central bank targets at 2.5 percent in the medium term, may decline to 0.6 percent in “the summer,” he said.

Last month, manufacturers cut their prices by the most since index data were first collected in January 2003 as companies said they had to “offer discounts in order to remain competitive,” according to HSBC. Employment declined for the seventh month, the longest streak in more than three years.

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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