Polish economy slows down faster than expected

Economic growth rate in 2019 clearly below expectations

In accordance with GUS data published today, GDP in Poland rose by 4.0% in 2019 vs. 5.1% in 2018, running below our forecast (4.2%) that was in line with the market expectations. Conducive to slower economic growth rate last year was mainly a lower contribution of inventories (-0.8 pp in 2019 vs. 0.4 pp in 2018). In addition, GDP growth was also slowed down by the deceleration in consumption (from 4.3% in 2018 down to 3.9% in 2019) and investments (from 8.9% down to 7.8%). The only factor boosting economic growth was a higher contribution of net exports (from 0.0 pp in 2018 up to 0.4 pp in 2019).

Surprising GDP structure in Q4 2019

Based on GUS data, we have estimated that real GDP growth rate stood at 2.9% YoY in Q4 2019 vs. 3.9% in Q3, which was a markedly slower pace from our expectations (3.5%). The structure of GDP growth in Q4 is somewhat surprising.

Q4 2019 recorded a marked increase in investments to 7.2-7.3% YoY vs. 4.7% in Q3 (we have expected an increase of 2.7% YoY). Considering the data on construction-assembly production for the October-December 2019 period (i.a. a visibly slower growth in the category “railway” and “roads”) as well as the profile of added value in construction (down by 1.6% YoY in Q4 2019 vs. a 3.6% increase in Q3), public investments cannot be expected to be responsible for the recovery in gross capital formation. It therefore suggests an intensified investment activity of enterprises in the modernization of existing fixed assets or increasing of production capacity.

In accordance with our estimates, consumption growth has clearly slowed down in Q4 (down to 3.4% vs. 3.9% in Q3), consistently with the data on wage fund dynamics (see MACROpulse of 21/1/2020). However, the slowdown in consumption growth was greater than we had expected, (3.8%) possibly due to households’ much higher propensity to save.

Q4 2019 saw a sharp decline in the net exports contribution to GDP growth (from 0.8 pp in Q3 to -0.5 pp), which signals a stronger-than-we-expected slowdown in exports, given a simultaneous still fast growth of imports (supported by consumption and investments). This factor has thus contributed the most to the slowdown of economic growth in Q4.

Economic growth will markedly slow down in 2020

The implied data on GDP in Q4 2019 pose a downside risk to our medium-term macroeconomic scenario. A lower starting point indicates lower path of economic growth in the whole 2020. We believe that the recovery of corporate investments in Q4 will likely not continue into 2020. The main factors limiting the investment activity of enterprises will be uncertainty about business climate abroad, increasing burdens related to higher costs of labour (contributions to the Employee Capital Plans and higher minimum wage), and short investment cycle. This view is also supported by the business survey results released yesterday (NBP Quick Monitoring), pointing to a significant deterioration of forecasts of financial situation and investment plans of companies.

We expect that the slowdown in consumption will continue into 2020 due to growing households’ propensity to save (in the wake of slowing down improvement in the labour market), launch of ECP (conducive to a decrease in households’ disposable income), slight decrease in employment (the effect of the sharp increase in the minimum wage and weaker demand), sharp increase in inflation, and the abatement of the positive impact of social transfer payments. On the other hand, private consumption growth will be boosted by higher minimum wage.

In the light of recent PMI surveys in the Eurozone and Germany, we believe that the risk of further significant deterioration in Poland’s main trading partners has diminished, which, given a weakening domestic demand, will be conducive to higher contribution of net exports to GDP growth.

The data on the economic activity in Q4 pose a downside risk to our forecast of economic growth in 2020 (3.0%). We will present our latest macroeconomic scenario in MACROmap of 10/2/2020.

The publication of today’s weaker-than-expected data on GDP in 2019 is slightly negative for PLN and yields on Polish bonds, we believe.