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Industrial production data out for Poland this Friday surprised even the gloomiest forecasters, showing an annual 10.6 per cent drop in December, the fastest contraction since April 2009 and well below the market consensus of a 6.5 per cent decline.

That has increases the chances of early rate cuts and some analysts worried that Poland may be heading for its first recession in two decades, the longest contraction-free run of any European country.

“A big step towards recession!”, notes Ernest Pytlarczyk of Bre Bank, saying that the weak industrial production numbers, recent gloomy unemployment data and steeply falling prices all point to the dangers of a contraction, something that the government and central bank still say is very unlikely

Part of the reason for the steep drop was statistical, there were fewer working days in December than for the same month in 2011, but it does show that Polish industry has been hard hit by the slump in domestic demand and by the crisis in the eurozone.

“The output decline was due to challenging demand conditions in both domestic and export markets. According to estimates released recently, Germany’s economy, Poland’s key exports market, witnessed a decrease in GDP by 0.5%q/q in 4Q12, negatively impacting demand for Polish products. The December output figure was also affected by the unfavorable working days effect, however, after eliminating for seasonal effects, output still fell by 5.1%y/y compared to a decline of only 1.9%y/y in November,” writes Maja Goettig, chief economist with KBC Securities.

Weak segments included the car industry, down by 22 per cent, furniture, down by 23 per cent, and electronics, down by 19 per cent. All of those have been workhorses of Polish exports in previous years.

The result is likely to be further interest rates cuts by the central bank, despite a surprisingly doveish statement put out after a rate cut earlier this month, the third in three months. The bank’s benchmark rate is now 4 per cent.

The prospect of more cuts is also strengthened by falling inflation, which is now 2.4 per cent, below the bank’s 2.5 per cent target.

Anna Zielinska-Globocka, a member of the bank’s rate setting Monetary Policy Council, said more cuts are likely.

“I think that a pause [in rate cuts] will come but I don’t think there will be a pause now, in February. Everything indicates that inflation will not be very high but that the slowdown in growth is quite strong. I will certainly not be in favour of a February pause. February is too soon to stop the cycle,” Zielinska-Glebocka told TVN CNBC television.

She went on to say that a final rate of 3.75 per cent would be too high and a percentage point overall reduction in the benchmark is too little.

The industrial production data brought a stop to the zloty’s recent appreciation trend. After the news the zloty was down 1.2 per cent against the euro at 4.16 and by 1.6 per cent to the US dollar at 3.12.

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