Unexpected inflation drop amidst the solid GDP growth

Polish economy avoids technical recession

In accordance with the GUS data published today, GDP growth declined to 3.6% YoY in Q3 from 5.8% in Q2, thus running slightly above the flash estimate published earlier by the GUS (3.5%). Seasonally-adjusted quarterly GDP growth accelerated from -2.3% in Q2 to 1.0% in Q3 (0.9% in accordance with the flash estimate). 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 for the Polish economy is materialising. In this scenario, 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).

Weaker consumption as the main reason behind the economic growth slowdown

Annual economic growth between Q2 and Q3 slowed down primarily due to a lower contribution of consumption (0.5 pp. in Q3 vs. 3.6 pp. in Q2) resulting from a slower real wage fund growth and much poorer consumer sentiment. Consequently, in Q3, the annual consumption growth slowed down to 0.9% vs. 6.4% in Q2, running slightly above our forecast (0.8%). We believe that the annual consumption growth will not exceed 0.5% YoY until the end of 2023 due to the effects mentioned above.

Strong slowdown in investments in the Polish economy>

Annual GDP growth between Q2 and Q3 was also driven down by a lower contribution of investments (0.3 pp. in Q3 vs. 1.0 pp. in Q2), with the investment growth rate decreasing from 6.6% YoY in Q2 to 2.0% YoY in Q3 (our forecast assumed it would stand at 6.1%). This data is somewhat surprising given the available data on the construction and assembly production and the data on investments carried out by companies having at least 50 employees. They indicated that investments kept on growing relatively quickly, driven by the projects that had started earlier and were drawing to a close, and by the companies’ increasing expenditures on transportation means. In this context, we believe that the investment growth in general was driven down by a strong slowdown of households’ housing demand and a slower growth in public investments and in investments carried out in the micro- and small enterprises sector. Though stronger than we expected, the slowdown of investment growth itself is consistent with our medium-term scenario which expects the slowdown to continue. It will be caused by the fading effect of completion of investment projects that were started earlier, which we referred to above, and by a poorer economic outlook and increased costs of financing related to the interest rates, which we forecast to stabilise on the current level in 2023.

Companies increase inventories contrary to expectations

A higher contribution of inventories, which rose from 1.8 pp. in Q2 to 2.2 pp. in Q3, comes as a huge surprise. This means that the increase in inventories was the main driver of GDP growth in Poland in Q3 as opposed to Q2, when the growth was primarily driven by consumption. The higher contribution of inventories is particularly striking given the business survey results (including PMIs) published over the last couple of months, which indicated that companies’ sales increasingly relied on inventories, with companies gradually reducing their current output, adjusting it to the decreasing demand. In this context, we believe that this higher contribution of inventories in Q3 is transitional, and their reduction will be driving the GDP growth down in the quarters to come.

Net exports support economic growth in Q3

Just as we expected, net exports were the most significant factor driving the GDP growth up between Q2 and Q3, with their contribution increasing from -0.7 pp. in Q2 to 0.6 pp. in Q3. At the same time, the growth in exports picked up to 6.9% YoY in Q3 from 5.2% in Q2, while the growth in imports dropped to 6.0% from 6.9%. In our opinion, exports in Q3 were supported, among others, by a growing number of foreign direct investments in Poland, activity recovery in the automotive industry, and taking over some of the supply chains from Ukraine.

Furthermore, 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. We believe that the net exports will remain a significant GDP growth driver in Q4 in Poland.

Inflation well below the market expectations

In accordance with the flash estimate published today, CPI inflation in Poland fell to 17.4% YoY in November from 17.9% in October, running markedly below the market consensus (18.0%) and our forecast (17.9%). Thus, inflation dropped for the first time since February 2022. GUS published partial data on the inflation structure, which contained information about price growth rates for the following categories: “food and non-alcoholic beverages”, “energy” and “fuels”. Inflation was driven down by a slower price growth in such categories as “energy” (36.8% YoY in November vs. 41.6% in October) and “fuels” (15.5% vs. 19.5%), while a faster price growth in the “food and non-alcoholic beverages” category (22.3% vs. 22.0%) as well as the core inflation rise (up to 11.3% YoY in November vs. 11.0% in October in accordance with our estimations) had an opposite impact. In the context of our forecast, what is most surprising about the data is the price growth slowdown in the “energy” category, which was much stronger than we had expected. Hence, today’s data carries a downside risk to our scenario, which expects annual average inflation in Poland to pick up to 14.4% from 5.1% in 2021, and then to fall to 11.8% in 2023.

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