POLAND'S ECONOMIC OUTLOOK IMPROVES
GDP rebounded quarter on quarter in Q1, but the economy likely swung back to contraction in Q2. Industrial production shrank month on month in April−June, while the PMI was stuck in contractionary terrain throughout the quarter and business confidence remained downbeat. Moreover, the external environment was unsupportive and interest rates remained elevated in the quarter. On the flip side, both inflation and the unemployment rate fell throughout Q2. Meanwhile, in mid-July the government announced that its embargo on Ukrainian grain would be extended until at least end-2023 to help support domestic agricultural prices.
Also in July, the cabinet approved a plan to build the country’s first nuclear plant—which should start producing energy in 2033—in order to diversify the energy mix. Meanwhile, the country is massing troops on its border with Belarus following maneuvers by Wagner mercenaries.
GDP will expand at a slower pace this year. Sticky inflation, high interest rates and a subdued Euro area economy will restrain activity. That said, lower energy prices compared to 2022 should lend some support to activity. Further spillovers from the ongoing Russia-Ukraine war pose a downside risk. An agreement on the disbursement of EU funds poses an upside risk. FocusEconomics panelists see GDP expanding 1.1% in 2023, which is up by 0.1 percentage points from one month ago, and expanding 2.8% in 2024.
Inflation fell to 11.5% in June (May: 13.0%). The reading was the lowest since March 2022 but remained well above the Central Bank’s 1.5–3.5% target band. Inflation should continue to fall during the remainder of the year but will remain above target due to pass-through effects and a higher minimum wage. Volatile commodity prices are a factor to watch. FocusEconomics panelists see consumer prices rising 12.0% on average in 2023, which is down by 0.4 percentage points from one month ago, and rising 6.0% on average in 2024. • At its 5–6 July meeting, the National Bank of Poland (NBP) kept its policy rate unchanged at 6.75%, as had been anticipated by markets. The NBP stood pat one again in July due to moderating inflation and softening economic growth, as it expects previous rate hikes to support disinflation. Our panelists expect rates to remain high this year amid sticky inflation. FocusEconomics panelists see the NBP reference rate ending 2023 at 6.43% and ending 2024 at 5.08%.
The zloty traded at PLN 4.41 per EUR on 28 July, appreciating 1.8% month on month. The PLN should lose ground by end-2023 as the Central Bank starts easing its monetary policy stance thanks to a moderation in inflation. The interest rate differential with the Euro area, the evolution of investors’ risk appetite and geopolitical tensions are factors to watch. FocusEconomics panelists see the zloty ending 2023 at PLN 4.59 per EUR and ending 2024 at PLN 4.60 per EUR.
REAL SECTOR
Decline in industrial output softens in June Industrial output declined 1.4% compared to the same month of the previous year in June, which was above May’s 2.8% decrease. Looking at the details of the release, mining and quarrying output plummeted in June, while manufacturing output declined at a milder pace. Meanwhile, electricity, gas and utilities production also dropped at a milder pace. On a seasonally adjusted monthly basis, industrial output rebounded, rising 0.7% in June (May: -1.0% mom). Meanwhile, the trend pointed down, with the annual average variation of industrial production coming in at minus 9.6% in June, down from May’s minus 9.3%. FocusEconomics panelists see industrial production expanding 0.1% in 2023, which is down by 0.6 percentage points from one month ago, and expanding 4.1% in 2024.
Retail sales growth rises in June Retail sales grew 2.1% year on year in June (May: +1.8% yoy). Looking at the details of the release, June’s pickup was broad-based, with the motor vehicles, motorcycles and parts, textiles, clothing and footwear and furniture, radio, tv and household appliances sub-sectors all improving. Meanwhile, annual average retail sales growth fell to 12.7% in June (May: +14.2%), signaling a worsening trend in the retail trade sector. FocusEconomics panelists see retail sales expanding 5.7% in 2023, which is down by 0.5 percentage points from one month ago, and expanding 5.9% in 2024.
Manufacturing PMI falls in June The S&P Global Manufacturing Purchasing Managers’ Index (PMI) came in at 45.1 in June, down from 47.0 in May. Consequently, the index moved further below the 50-threshold, signaling a sharper deterioration in business conditions in the manufacturing sector from the prior month. Faster contractions in output, employment, new orders and purchasing activity were behind the deterioration in the headline reading. On the price front, input prices continued to decline, partially thanks to a further easing of supply chain pressures, leading output prices to fall at the sharpest pace on record. Lastly, output expectations for the year ahead remained subdued. FocusEconomics panelists see fixed investment expanding 3.7% in 2023, which is up by 0.3 percentage points from one month ago, and expanding 2.6% in 2024.
OUTLOOK
Business sentiment falls in July Business confidence fell to minus 14.0 in July from June’s minus 11.4. Therefore, the index moved further below the 0-threshold, indicating growing pessimism among businesses. Businesses’ assessments turned more negative over order books, the current general economic situation, the financial situation and employment. Moreover, firms were increasingly downbeat regarding expectations of future output, financial situation and the general economic situation.
MONETARY SECTOR
Inflation falls in June Inflation came in at 11.5% in June, down from May’s 13.0%. June’s reading represented the lowest inflation rate since March 2022. The slowdown was primarily driven by slower rises in prices for food and non-alcoholic beverages and utilities as well as by falling prices for fuels. Annual average inflation declined to 15.9% in June from 16.3% in May. Meanwhile, core inflation fell to 11.5% in May (the latest month for which data is available), from the previous month’s 12.2%. Lastly, consumer prices were unchanged from the previous month in June, matching May’s reading. Commenting on the release, Rafal Benecki, senior economist at ING, stated: “At this rate of decline, we will see CPI at 9.8% year-on-year in August, so we think the National Bank of Poland (NBP) can cut rates in September. By year- end, CPI inflation may slow closer to 7% yoy. [...] Hence another interest rate cut in October is also very likely.” FocusEconomics panelists see consumer prices rising 12.0% on average in 2023, which is down by 0.4 percentage points from one month ago, and rising 6.0% on average in 2024.
Central Bank maintains pause in July At its 5–6 July meeting, the National Bank of Poland (NBP) left the key reference rate unchanged at 6.75% once again, following June’s hold. The NBP also kept the Lombard rate at 7.25%, the discount rate at 6.85%, the rediscount rate at 6.80% and the deposit rate at 6.25%. July’s decision fell in line with market expectations.
The NBP stood pat again in July due to moderating inflation and softening economic growth. On the price front, lower commodity prices, easing supply chain disruptions, weaker domestic activity and previous interest rate increases continued to support a disinflationary trend: Inflation fell to 11.5% in June (May: 13.0%). This prompted the Bank to revise its previous inflation forecast range for 2023 to 11.1–12.7%—previously estimated at 10.2–13.5% in March. Meanwhile, the NBP stressed that economic conditions have deteriorated globally and domestically, with annual output in retail sales, manufacturing and construction declining in May.
In turn, the Bank lowered its 2023 GDP growth forecast range to -0.2–1.3%, from -0.1–1.8% in March, further supporting the rate hold. In its communiqué, the NBP reiterated its commitment to take upcoming decisions on the basis of incoming data on inflation and economic activity, while remaining ready to “take all necessary actions in order to ensure macroeconomic and financial stability,” including through foreign exchange market interventions. Going forward, the majority of our panel anticipates interest rates ending the year at current levels. That said, Central Bank Governor Glapiński signaled in the NBP’s press conference that rate cuts could begin in September if inflation were to fall within single digits by then.
From the August edition of FocusEconomics Consensus Forecast - Central & Eastern Europe
