Inflation still double-digit, GDP lagging behind expectations

GDP lagging behind expectations

In accordance with the final estimate published by the GUS, GDP growth slowed down from -0.3% YoY in Q1 2023 to -0.6% YoY in Q2, running slightly below the flash estimate figure (-0.5%) and our forecast (-0.2%).

GDP growth in Q2 was driven down by a downward contribution of consumption, which went down from -2.0% YoY in Q1 to -2.7% in Q2. The decline in annual consumption growth resulted primarily from last year’s high base effect arising from the increase in households’ expenses in the wake of the inflow of refugees from Ukraine. GDP growth in Q2 was also slowed by a downward contribution of net exports (3.1 pp in Q2 vs. 4.3 pp in Q1) resulting from the decline in exports growth, which was stronger than that in the imports. Interestingly enough, Q2 saw a surprising decline in exports volume in YoY terms, which we believe to have been caused to a certain extent by weakening goods’ exports to Poland’s main trade partners.

Q2 also saw a strong downward contribution of inventories to the GDP growth (-3.8 pp), which nonetheless went slightly up from -4.1 pp in Q1, causing the GDP growth figures to go up. We believe that the continuous, strong, downward contribution of inventories results from a further reduction of excessive buffer stocks aggregated in the industrial manufacturing sector during the pandemic and after the outbreak of war in Ukraine, as shown in the PMI survey results.

What is worth noting about the GDP growth breakdown data is the acceleration of investment growth from 5.5% YoY in Q1 to 7.9% in Q2. In our opinion, a faster growth in investments carried out by companies employing at least 50 people (from 7.2% YoY in Q1 to 12.9% in Q2, which was the best result since Q2 2019) was the main factor driving the gross fixed capital formation up. The aforementioned acceleration was strong enough to compensate for the likely slowing growth in housing and public investments which had a negative impact on total expenditure growth. Growing expenditures on “machinery, technical equipment and tools” were the main factor driving the companies’ investments up in Q2. It indicates that the slowing growth in external demand (due to a strong downturn in the Eurozone’s industrial manufacturing sector) and internal demand (due to households cutting down their expenses on consumption) is a strong incentive for the enterprises to carry out restructuring processes in order to increase their labour productivity.

MPC to cut interest rates in September

GDP growth in Q2 came in behind our forecast. It also lagged behind the NBP’s July forecast (-0.1% YoY). Economic activity and sentiment data for July and August indicate that economic growth in Q3 is likely to be slower than assumed in the NBP projection (1.2% YoY) and our forecast (1.4%).

In accordance with the flash estimate published by the GUS, inflation went down from 10.8% YoY in July to 10.1% in August. Inflation was caused to fall significantly by last year’s high base effects, which drove down the prices of food and fuels as well as core inflation excluding food and fuels. In our opinion, with the economic outlook becoming less rosy for Poland, a majority of the MPC members will be inclined to cut interest rates by 25 bps in the September meeting even though one of the prerequisites for cuts as named by the NBP Governor in June, i.e. inflation falling below 10% (see MACROpulse of 06/07/2023), has not been met. Consequently, we have revised our interest rate forecast in such a way that now we expect the MPC to cut interest rates in September and October, each time by 25 bps (before the revision, we had expected the MPC to cut the rates in October and November). We still expect the monetary easing cycle to resume in Q1 2024, with the expected scale of cuts in 2024 remaining unchanged at 125 bps.

We will present our revised macroeconomic scenario in the Monday’s MACROmap.

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