Record-high contribution of inventories to GDP growth

According to GUS data published today, GDP growth increased to 8.5% YoY in Q1 2022 compared with a growth of 7.6% YoY in Q4 2021, in line with the previous flash estimate. Seasonally-adjusted quarterly GDP growth climbed to 2.5% in Q1, up from 1.8% in Q4, showing that economic growth has accelerated.

The only GDP component that contributed to accelerated economic growth in Q1 was the change in inventories. The contribution of the increase in inventories to economic growth expanded from 4.3 pp in Q4 to 7.7 pp in Q1, the highest level on record. In Q1, inventories in enterprises increased by PLN 65.7bn (the highest quarterly growth in history) compared with a growth of PLN 46.9bn in Q4 and PLN 99.3bn in all of 2021. In our opinion, the sharp rise in inventories recorded in Q1 was, as in H2 2021, largely related to the further build-up of buffer stocks by businesses motivated by the rapid increase in input prices and the need to maintain continuity of production in an environment of supply chain disruptions caused by the war in Ukraine and the intensification of the COVID-19 pandemic in China. We believe that such a high contribution of the increase in inventories to GDP growth will not be maintained in the coming quarters, which will be conducive to a marked slowdown in the industrial production and GDP.

Growth of consumption and investments slowing down

The factor with the most significant contribution to the slowdown in economic growth observed in Q1 was the decline in the contribution of net exports to GDP growth from -2.5 pp in Q4 to -3.8 pp (the effect of a more substantial decline in growth of exports as compared to growth of imports). Particularly noteworthy in the GDP growth structure is also the slowdown in consumption growth from 8.0% YoY in Q4 to 6.6% in Q1 (caused by reduced household demand for services due to slower growth in real disposable income) and a diminished growth rate of gross fixed capital formation from 5.2% to 4.3% (following from declining household housing investments and the considerable slowdown in investments in medium and large enterprises). We expect that in the coming quarters, despite increased spending accompanying the influx of refugees from Ukraine, the pace of consumption growth will slow down on the back of substantial growth in inflation expected by us and the deterioration of consumer sentiment. We also expect a marked decline in investment growth, a scenario supported by a pronounced fall in business sentiment indices reflecting the propensity of businesses to launch new investment projects and rising interest rates contributing to a deepening decline in residential investments.

Soft landing remains baseline scenario

Today’s GDP data for Q1, coupled with data on economic activity and business sentiment in April-May released thus far, signals an upside risk to our forecast of economic growth in 2022 (4.1%) and, due to the high base effect, a downside risk to the GDP growth expected by us in 2023 (3,3%). However, we stand by our scenario projecting that in the coming quarters, the Polish economy will see a soft landing related to reduced external demand due to a slowdown in economic growth in Poland’s main trading partners and slower growth of domestic demand. In our view, the probability of a so-called technical recession (decline in seasonally-adjusted GDP for at least two consecutive quarters) remains low. Any contraction in GDP in this period will not be accompanied by a strong deterioration in the labour market, which is crucial for assessing the social impact of a recession and the potential fiscal and monetary policy response. We will publish our revised macroeconomic scenario in the next MACROmap.

More arguments in favour of monetary tightening

According to GUS data, the annual seasonally-adjusted GDP growth in Q1 (9.2% YoY) was significantly higher than the growth expected in the NBP’s March projection (6.8%). Combined with the flash data on May inflation published today (13.9% vs. the market consensus of 13.5% and our forecast of 13.7%), signalling a significant upward deviation of inflation from the level anticipated by the NBP in Q2 (10.3% YoY), this strongly supports our scenario predicting that the MPC will continue the cycle of reference rate hikes in the coming months. We stand by our assessment that this cycle will end in Q3 when the NBP reference rate reaches 7.0%.

In our opinion, today’s GDP and inflation data is slightly positive for the PLN exchange rate and yields on Polish bonds.