“Soft landing” scenario for the Polish economy is materialising

Inflation in line with GUS flash estimate

According to final GUS data, Poland's CPI inflation rose to 17.9% YoY in October vs. 17.2% YoY in September, in line with the flash estimate by GUS and below the market consensus (18.0%) and our forecast (18.2%). Thus, inflation reached its highest since December 1996, and was markedly above the upper band for deviations from the NBP’s inflation target (3.5% YoY) for 19 consecutive months.

Food prices growth keeps on accelerating

Inflation was primarily driven up by a stronger growth in prices in the “food and non-alcoholic beverages” category (22.0% YoY in October vs. 19.3% in September). The growth in the prices of food can still be observed across a wide range of product categories. While initially it was agricultural commodities that drove the food price growth up due to their growing prices, now the main source of growth are the increasing costs of food processing and distribution caused by the growing costs of energy, material, labour, etc. Sugar (97.8% YoY in October), flour (45.4%), sugar vegetable fats (44.4%), poultry (42.3%) and milk (36.8%) were those product categories where the strongest growth was reported. A stronger growth in the prices of fuels (19.5% vs. 18.3%) driven by high prices of oil and the PLN weakening against the USD observed in the last couple of months was also conducive to inflation rise. Headline inflation was also driven up by higher core inflation, which rose from 10.7% in September to 11.1% in October according to our estimates, and reached the highest level since January 1999. Its rise was connected with a stronger growth in prices in such categories as “alcoholic beverages and tobacco” (mainly due to the growing prices of alcoholic beverages), “recreation and culture” (mainly due to a stronger growth in the prices of package holidays abroad connected with the PLN depreciation seen over the last couple of months), "health” (mainly due to higher prices of pharmaceutical products), “restaurants and hotels”, “communication” (mainly due to the growing prices of telephone and telefax services) and "education". However, a slower growth in the prices of energy (41.6% YoY vs. 44.3%) resulting from a slower growth in the prices of liquid and solid fuels, electricity and gas was driving inflation down. However, it is worth noting that liquid and solid fuels are the inflation basket category that continues to see the strongest, though slower, growth in prices (147.0% YoY in October vs. 172.2% in September).

Inflation will keep on rising

In our opinion, the continuing, strong growth in the prices of food and non-alcoholic beverages and core inflation carries an upside risk to our forecast, in which inflation was to rise to 14.5% YoY in 2022 vs. 5.1%, and then to fall to 10.4% in 2023. In our scenario, we have assumed that the Anti-inflationary Shield programme will stay in force until the end of 2023 (see MACROmap of 10/10/2022), but the recent statements by the Polish Prime Minister M. Morawiecki suggest that the programme will be significantly modified in 2023. At the same time, we believe that the recent MPC decision and Governor A. Glapiński’s statements carry a significant downside risk to our scenario of the reference rate reaching the target of 7.25%. We will present our revised macroeconomic scenario including new inflation and interest rates paths in the next MACROmap.

GDP growth slightly above market expectations

According to a flash estimate of the Polish Central Statistical Office by the GUS, GDP growth dropped to 3.5% YoY in Q3 vs. 5.8% YoY in Q2, running slightly above the market consensus (3.4%) and below our forecast (3.9%). The data published by the GUS is a flash estimate and the full data including information on its structure will be published at the end of the month. We believe that the GDP growth slowdown between Q3 and Q2 resulted from a lower contribution of consumption that was driven down by the decline in real wage fund growth and a strong deterioration of consumer sentiments (see MACROpulse of 21/10/2022). A higher contribution of net exports, which we believe to have been the main driver of economic growth in Q3 was most likely to exert the opposite impact. Lower consumption demand in Poland and the significant PLN depreciation against main currencies seen over the last couple of months were conducive to a higher contribution of net exports towards the GDP growth.

“Soft landing” scenario for the Polish economy is materialising

Seasonally-adjusted quarterly GDP growth accelerated from -2.3% in Q2 to 0.9% in Q3. This means that Poland has avoided the so-called technical recession understood as the quarterly GDP growth decline for at least two consecutive quarters. This means that our “soft landing" scenario, in which GDP growth in Poland in 2023 will remain positive despite a significant slowdown (1.2% YoY vs. 4.5% in 2022 and 6.8% in 2021), is materialising.

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