GDP bottoming out

Final data on GDP consistent with the flash estimate

In accordance with the final estimate published by the GUS, Polish GDP increased by 2.0% YoY in Q4 2022 comparing to a 3.6% growth in Q3, in line with the GUS flash estimate. Seasonally adjusted GDP decreased by 2.4% QoQ in Q4 vs. +1.0% QoQ in Q3. This means that—taking into account the 2.3% QoQ seasonally adjusted GDP drop in Q2 2022—its level in Q4 2022 was 3.7% lower than in Q1 2022. This was, excluding the period of the first wave of the COVID-19 pandemic in 2020, the largest cumulative fall in GDP in three consecutive quarters in the history of the data we have (since 2002).

Strong fall in consumption in Q4, inventories continue to rise rapidly

The main factor influencing the reduction in annual GDP growth in Q4 was the decline in consumption, which, seasonally adjusted, fell by 2.5% QoQ in Q4 (down by 1.5% YoY vs. an increase of 0.9% YoY in Q3). The pattern of seasonally adjusted GDP growth in Q4 indicates that the reduction in consumer demand contributed to a strong decline in activity in the services sector, with significant reductions in value added recorded in divisions such as 'trade; repair of motor vehicles' and 'accommodation and catering'. The YoY decline in private consumption was in line with our expectations and was recorded for the first time since Q1 2021. Factors restraining consumption were a decline in real wage fund growth in a high-inflation environment, weak consumer sentiment, heightened uncertainty and the extinction of pent-up demand. We expect the YoY decline in consumption, constrained by high inflation and the decline in the real wage fund, as well as the high base effects related to the influx of refugees from Ukraine (see MACROmap of 27/02/2023), to continue in H1 2023. We expect a clear acceleration in consumption growth, supported by a marked fall in inflation, as well as an increase in social transfers (see MACROmap 19/12/2022) in H2 2023.

A lower contribution from change in inventories (which declined in Q4 to 1.1 pp vs. 2.2 pp in Q3) was another factor behind the YoY GDP slowdown between Q3 and Q4. However, change in inventories, along with gross fixed capital formation, remained the main source of Poland’s GDP growth in Q4, similarly to Q3. It is worth mentioning that inventories increased by PLN 59.5bn in Q4 compared to Q3, which was the second highest increase in inventories ever. Throughout 2022, inventories increased by a total of 220.3bn, which represented 7.2% of GDP. In our opinion, what contributed to the strong increase in inventories was the globally observed trend of shortening supply chains, which intensified after the outbreak of war in Ukraine. This factor encouraged the relocation of intermediate goods production to Poland and increased investment in buildings to store these goods. We believe that, given the strong growth in inventories to date, their change will make a negative contribution to GDP growth in H1 2023, and then, as the global and domestic economic recovery intensifies, this contribution will become positive again.

Investment growth picks up markedly

What is particularly worth noting about the breakdown of economic growth in Q4 is that investment growth picked up markedly, to 4.9% YoY compared to 2.0% growth in Q3. We believe that faster growth in gross fixed capital formation in Q4 is accounted for by higher public investment, which offset negative impacts of slowdown in housing and business investment on total investment. Our assessment is supported by construction and assembly production data for Q4 2022 (a rise in the total contribution of production sold in the 'roads’, ‘bridges’, and ‘railways’ categories to YoY growth in total construction and assembly production. We expect that in the coming quarters of 2023, a surge in local government investment (before local government elections) and the completion of projects co-funded by the European Union under the long-term 2014-2020 perspective will drive growth in public investment up and thus will partially offset the slowdown in total investment.

The slowdown seen in Q4 2022 was also offset to some extent by a slightly higher contribution from net exports: 0.9 pp vs. 0.6 pp in Q3. A drop in private and public consumption (of 1.6% YoY compared to a rise of 0.1% in Q3) and a lower contribution from inventories drove growth in domestic demand down (to 1.1% YoY from 3.1% in Q3). Consequently, Q4 saw growth in imports slow to 0.2% YoY from 6.0% in Q3, while growth in exports slowed from 6.9% YoY to 2.0%, mainly as a result of an economic slowdown in the Eurozone.

Bottoming out in Q1 and then gradual recovery

Today’s GDP figures support our ‘soft landing’ scenario for Poland’s economy. The scenario expects Poland’s GDP growth to slow markedly in 2023, to 1.2% from 4.9% in 2022, but to remain positive. The slowdown is not expected to be accompanied by a marked rise in unemployment. We expect to see a slight drop in seasonally adjusted GDP in Q1 compared to Q4, which will mark the bottom of the economic cycle. In the coming quarters, we expect to see an economic recovery, getting stronger in H2 2023 with falling inflation and faster economic growth seen by Poland’s main trading partners.

We believe that GDP data for Q4 is neutral for the PLN and yields on bonds.