A strong decline in inventories contribution to GDP growth

In accordance with the GUS data published today, GDP growth shrank to 5.5% YoY in Q2 from 8.5% in Q1, thus running slightly above the flash estimate published earlier by the GUS (5.3%). Just as we expected, the decline in annual GDP growth seen in Q2 was mainly caused by the contribution of inventories growth towards the GDP growth, which fell down from an all-time high of 7.7 pp. in Q1 to 1.9 pp. in Q2. In nominal terms, inventories in the second quarter increased by PLN 36.1bn, which means that they continued to grow for seven consecutive quarters. We expect the contribution of change in inventories to GDP growth to be negative from the third quarter onwards despite actions taken by many companies to shorten supply chains, which drove the inventories up. In other words, sales in the industry will increasingly rely on inventories in the months to come, and the companies will most probably be reducing their current output, adjusting it to the decreasing demand. This scenario is supported by a strong growth of the PMI component seen over the last couple of months, which is indicative of a quick increase in the finished products inventories in Poland, the Eurozone and Germany.

Investments growth surprisingly high

The data on investments growth in Q2, which accelerated from 4.3% YoY in Q1 to 7.1% in Q2, running markedly above our forecast (0.7% YoY), has come as a surprise. The available data on construction and assembly production and investments of companies having at least 50 employees indicates that it was an increased growth in investments carried out by medium-sized and large companies (from 1.3% YoY in Q1 to 7.4% in Q2) that was the main reason behind the acceleration of growth in gross expenditures on fixed assets in Q2. It was mainly caused by the accelerated growth in expenditures made by private domestic and international companies. Despite the acceleration of growth in total investment expenditures in Q2 (which in our opinion was primarily connected with the companies finishing their investment projects), we maintain our scenario in which the investment growth will slow down significantly in the quarters to come, driven down by interest rate hikes, a decline in households’ housing investments, a poorer outlook for economic growth and an increased uncertainty concerning the impact of the “gas shock” on the Polish economy in the quarters to come.

High consumption dynamics for the last time

Just as we had expected, consumption growth fell down slightly between the first and the second quarter (from 6.6% YoY to 6.4%) in connection with households’ poorer sentiments and a decline in real wages. We expect the consumption dynamics to slow down significantly in Q3, driven down by a further decline in real wages, further deterioration in consumer sentiments, a slower growth in consumer loans, and lower consumption-related expenses connected with the inflow of refugees.

Export (5.2% YoY) and import (7.8% YoY) growth in Q2 ran higher than we had expected (2.0% and 4.9% respectively), but the net export contribution to GDP growth (-1.2 pp.) was close to our forecast (-1.5 pp.). We expect the import and export growth to slow down in the quarters to come, driven by the expected decline in production and the number of new orders in the industrial manufacturing sector in the Eurozone and in Germany, and by lower domestic demand in Poland driven down by slower consumption and investment growth.

How long will the recession last?

Seasonally-adjusted quarterly GDP growth fell from 2.5% in Q1 to -2,1% in Q2. We expect the quarterly GDP growth to be negative in Q3 as well, which means that Poland would go into the so-called technical recession understood as the seasonally-adjusted GDP declining for at least two consecutive quarters. We believe there is a risk the GDP might fall down in the fourth quarter as well, which may occur if the so-called "gas shock" happens, meaning the materialisation of a deep recession scenario in Germany, which will drive the activity in the Polish industrial manufacturing sector strongly down, and will keep on driving the energy prices up (see MACROmap of 11/07/2022). We will present our revised macroeconomic scenario including today’s data on the GDP growth structure in Q2 in the next MACROmap.

PLN volatility may increase

Today’s GDP data (including in particular a significant growth in investments in Q2) and a surprisingly high flash estimate for inflation in August published by the GUS today (rising from 15.6% YoY in July to 16.1% in August with core inflation estimated to grow from 9.3% YoY in July to about 10% in August) support our scenario in which the MPC will raise the interest rates again in its meeting in September 2022. Recent statements made by the NBP President and certain MPC members indicate, though, that the target level for interest rates may be significantly lower than currently expected by the market (7.75% for the NBP reference rate). This means that we can expect the PLN exchange rate to be increasingly volatile in the weeks to come.

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

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