Polish economy is coping with the pandemic better than expected

Decrease in inflation due to lower dynamics of food prices

In accordance with the final GUS data, CPI inflation dropped to 3.0% in July vs. 3.3% YoY in June, running below the GUS flash estimate equal to the market consensus and our forecast (3.2%). The main factor behind lower inflation in July were lower dynamics of the prices of food and non-alcoholic beverages (3.9% YoY in July vs. 5.7% in June). Lower inflation rate in this category resulted mostly from lower dynamics of the prices of vegetables, fruit, and meat, mainly due to strong last year’s high base effects. Lower inflation resulted also from a slower rise in the prices of energy (4.5% YoY in July vs. 5.1% in June) due to the reduction of gas prices introduced from 1 July 2020. In turn, higher dynamics of fuel prices (-16.1% YoY in July vs. -19.3% in June), in the wake of growing global oil prices, had an opposite impact on inflation. Conducive to higher inflation was also higher core inflation, which, according to our estimates, rose to 4.2% YoY in July vs. 4.1% in June, hitting the highest level since December 2001. The increase in core inflation resulted from higher price dynamics in the categories: “clothing and footwear”, “other expenditure on goods and services”, “communication”, “household equipment and routine household maintenance”, and “alcoholic beverages and tobacco products”.

Pandemic price rises are slowly easing off

Noteworthy is the structure of core inflation showing the first signs of the correction of prices which surged in recent months due to the phenomenon of companies transferring the costs related to the need of meeting security requirements resulting from the pandemic to consumers. Although further monthly increase in prices was recorded in the category: “hairdressing, beauty treatment and personal care services”, we saw falls in prices in the categories: “dental services” or “personal hygiene articles and cosmetics”. At the same time, prices dropped sharply in the category: “organized tourism”, due to cheaper package holidays abroad. Although last month saw a sharp rise in prices in this category, it should be noted that more than 50% of the prices used for the calculations at the time were GUS estimates and only the July data have provided a better picture of the situation in this sector (see MACROpulse of 15/7/2020).

Inflation will stabilize in the coming months

We forecast that by the end of 2020 inflation will have stabilized at ca. 3.0%. The forecast by us decrease in core inflation and food price dynamics will be offset by higher dynamics of the prices of fuels and energy (see MACROmap of 27/7/2020). The envisaged by us stabilization of inflation in the coming months is consistent with our scenario, in which the first hike of interest rates will take place in November 2022.

Polish economy is coping with the pandemic better than expected

In accordance with the GUS data published today, the GDP growth rate dropped to -8.2 YoY in Q2 vs. 2.0% YoY in Q1, running above the market consensus (-8.6%) and our forecast (-10.5%). Seasonally-adjusted quarterly GDP dynamics dropped to -8.9% in Q2 vs. -0.4% in Q1. Thus, Poland has for the first time, at least since 2002 (namely since GUS started publishing quarterly GDP data), recorded so-called technical recession (quarterly GDP dynamics falling down for two quarters in a row). The GUS data are a flash estimate. Full GDP data including information on its structure will be published towards the end of August. We believe that the main reason for the smaller-than-we-expected scale of GDP decrease in Q2 was a higher-than-we-forecasted contribution of net exports (see MACROmap of 27/7/2020). This view is supported by the yesterday’s reading of the Polish balance of payments which pointed to a record high surplus in the balance on goods in June. Considering a high downside risk we see for investments in H2 2020, the higher-than-we-expected GDP growth in Q2 does not alter our forecast, in which in the whole 2020 the Polish GDP will decrease by 3.8% vs. a 4.1% increase in 2019. At the same time, today’s data on GDP and inflation are neutral for PLN and yields on Polish bonds.