Polish Economy: Slow Recovery Ahead Amid CPI Challenges and Political Uncertainty
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The Polish economy should reach a bottom in 1H23 but recovery in 2H23 could be sluggish as the main growth engine from last year (consumption) will improve only gradually with lower CPI and some election spending. Net exports should be the main growth driver depending on uncertain foreign demand. CPI peaked in February at 18.4%YoY but should fall to single digits in 3Q23 and 2024.
July’s NBP projection is likely to bring a lower CPI trajectory and the NBP may provide a single cut in 2H23 (50% possibility), also referring to strong PLN. We see risk of persistently high core CPI at c.5% in 2024- 25. To achieve the 2.5% target, Poland needs a paradigm shift in policy, ie, nominal wages growth below 5%YoY, less consumption and more investment. PLN is no longer undervalued; we still see some appreciation. POLGBs curve may keep steepening due to rate cut expectations driving the short end and risk of spending affecting the long end, both from the ruling and opposition parties.
Forecast summary
GDP composition (%YoY)
Macro digest
Economic growth was choppy and uneven in 2022 amid energy and war shocks, but the Polish economy managed to expand by a hefty 5.1% even though economic conditions deteriorated in the second half of the year. With wages failing to catch up with double-digit inflation, real disposable incomes of households deteriorated, weighing down on consumption. Consumption contracted in 4Q22 and 1Q23 in annual trends and is projected to remain weak most of 2023.
At the same time, investment should continue expanding on the back of outlays by large firms and public infrastructure and military spending. 1Q23 brought a contraction in annual GDP (-0.3%), but it was shallower than expected. In 2023, GDP growth is projected at 1.2% as an improving foreign trade balance (subdued imports) will more than compensate for weak domestic demand exacerbated by destocking.
Real GDP (PLNbn, 2015 prices, SA)
Consumer prices jumped by 14.4% in 2022 and average CPI is expected to remain double-digit in 2023, but inflation has passed the peak. The downward trend in the headline CPI is clear and core inflation started slower sequential growth. The strong disinflationary trends abroad (lower commodity prices, GVC in pre-pandemic conditions) and PLN firming, improved the outlook for core inflation decline, but it will moderate visibly lower than headline consumer inflation. Still, some policymakers flag a cut in NBP rates in late2023. We still see risks of inflation anchoring above the upper bound over the medium term (tight labour market, wage pressure, fiscal expansion).
As a result, the return of CPI to the NBP target of 2.5% is likely to be a long process. Nonetheless, we assess the odds of an NBP rate cut this year at nearly 50% given policy guidance from the NBP governor Glapiński, who said a rate cut is possible, provided inflation falls below 10% YoY, which we see in September (to be released at the beginning of October).
Change in inventories contribution to YoY GDP (ppt)
General elections in October 2023 have led to a series of fiscal pledges by the government. It has announced: a new permanent spending from 2024 (0.7% of GDP) and 0.6% of GDP one-off spending for 2023 (and 0.7% of GDP higher central deficit). The opposition joined in and declared additional fiscal spending if it gained power (2.4% of GDP).
At the same time, the Recovery and Resilience funds for Poland remain frozen and any breakthrough in the conflict over the rule of law between Warsaw and Brussels is unlikely before the elections in Poland. Public debt is moderate by EU standards (below 50%) but Poland has a high structural deficit, foreign investors are eager to purchase Polish Eurobonds, unlike POLGBs, but high liquidity of the domestic banks ensures strong demand for POLGBs.
In such an environment, public borrowing is not a challenge for authorities, at least not over the short to medium term.
