CEE central banks seek peak in hiking cycle | Article

Poland: NBP becomes dovish, but inflation hasn’t peaked yet

Poland’s GDP growth in the second quarter surprised on the downside, reaching 5.5% year-on-year compared to 8.5% year-on-year in the first three months. The 2.1% quarter-over-quarter (seasonally adjusted) sequential slowdown was the second-worst in decades, only deepening during the pandemic in early 2020. We believe the data exaggerates the extent of the economic slowdown in recent years. quarter and the sharp sequential decline was also caused by statistical revisions. However, the figures mark a turning point in activity and the possible start of a technical recession in 2022.

July’s activity figures paint a similar picture, with industrial and construction, manufacturing and retail sales surprisingly lower; the backdrop of this data shows that the economy is in decline. Old manufacturing growth engines have slowed and seasonally adjusted retail sales indicate that the consumer boom is fading. We are now seeing indicators such as the PMI index falling well below 50 and consumer sentiment is worse than during the pandemic. The influx of some 2 million Ukrainian refugees is supporting the sale of basic necessities, but the growth of durable goods is weakening.

After stabilizing over the summer, the August CPI figures show that inflationary pressures are picking up across all categories. Most worrying is the sequential growth in core inflation, which has picked up again after the June-July slowdown. This aligns with our non-consensus view that the CPI should reach its new high later this year and next year, reaching just under 20% year-over-year. The energy price shock is largely to blame and the government is preparing offsetting measures, but maintaining them may be prohibitively expensive.

The draft 2023 budget presents a sectoral deficit of 4.4% of GDP almost in line with our forecast and around 4.5% in 2022. We consider the revenue estimates to be reasonable, but the expenditure concerns could be higher given the energy crisis. In addition, locally financed investment projects can replace the EU recovery plan, thus increasing borrowing needs or the deficit.

Overall, fiscal stimulus in 2023 should be comparable to more than 3% of GDP that we estimate for 2022, so we see upside risk to the 2023 deficit and higher than expected borrowing needs. Yet Poland appears to be somewhere between Hungary (where the pre-election fiscal expansion was very high) and the Czech Republic, which achieved orthodox monetary and fiscal consolidation in 2022.

Poland’s Monetary Policy Committee shifted to a dovish tone, but the governor withdrew his opinion of “a 25 basis point hike and it’s done”. We have lowered our terminal rate forecast from 8.5% to 7.5%, which is a little higher than the consensus but in line with market prices. We still think the risk of persistent inflation is high, but the government would need to mask inflation with additional extraordinary measures and fiscal stimulus would still be directed at households. The economic slowdown would make the MPC less inclined to rise, but recent CPI data from Poland and elsewhere confirms our view that the energy shock must feed through to prices and the CPI peak is still in front of us.