Poland’s economy has bottomed but anaemic growth lies ahead

Retail sales fell 7.2% YoY in March (ING: -6.2%; consensus: -5.7%). Stripping out seasonal factors, sales contracted by 1.3% MoM. A high reference base contributed to the deepening of the YoY decline. In March 2022, the first wave of refugees from Ukraine arrived in Poland, which boosted sales of food, clothing and pharmaceuticals. March data shows that the deep decline in fuel sales continued (-20.7% YoY), food sales fell for the third consecutive month (again by 4.6% YoY), and sales of furniture, consumer electronics and household appliances have been falling on a monthly basis since May (except in January when +1.4% YoY was recorded).

The broader economic context is also unfavourable. High inflation has translated into a decline in real purchasing power, resulting in a drop in consumption. We forecast that household consumption declined by about 3% YoY in 1Q23, following a 1.1% YoY drop in 4Q22. We expect a slight rebound in consumption only in 2H23, provided disinflation continues.

Industrial production fell by 2.9% YoY last month (ING: -1.5%; consensus: -1.9%), following a 1.0% YoY decline in February. Seasonally-adjusted output dropped by 1.0% MoM.

The weak March result was heavily weighed down by a high base in energy generation, which translated into a 21.8% YoY decline in output in this section. Manufacturing production declined for the second consecutive month (-0.4% MoM), which we link to weakening demand from European, including German, manufacturing. Mining also recorded weak results (-7.1% YoY).

Among the main divisions of manufacturing the deepest declines were posted in wood (-22.0%), chemicals (21.8%) and metal manufacturing (-19.8%). In contrast, dynamic growth continues in the automotive industry and related industries. The production of automobiles, trailers and semi-trailers increased by 36.5% YoY, electrical equipment (including batteries for autos) by 20.3%, and other transportation equipment by 16.8% YoY. This is due to the normalisation of supply chains and the fulfilment of outstanding production orders.

Construction output fell 1.5% YoY in March, compared to an increase of 6.6% YoY in February. This is a far worse result than the consensus (+0.9%). The dismal performance is most likely due mainly to residential construction, although infrastructure work did not fare well either.

Construction of buildings fell by 10.5% YoY in March. This is a result of the still difficult situation in the housing market, primarily related to the sharp rise in interest rates. The number of housing units under construction has clearly fallen from last year's peaks, but still remains at historically high levels. Developers are most likely finishing projects already underway, but not starting new ones. With current demand, the apartments already on offer will cover demand for at least a year. The situation is unlikely to improve anytime soon, especially since some potential buyers may be waiting for details of the government support programme.

In the case of other categories, we are most likely to see the effects of the completion of public investments in the last accounting year of the "old" EU budget. Production of civil engineering construction increased by 9.5% YoY, but specialised works fell by 2.7% YoY. Public investment is likely to offset poor private outlays this year.

Producer price index (PPI) growth slowed to 10.1% YoY in March (ING: 10.8%; consensus: 11.2%) from 18.2% YoY in February (revised). The main reason for the strong year-on-year decline in PPI inflation is the very high reference base. In March 2022, producer prices rose 6.6% MoM, with prices in the division that includes refined petroleum products rising more than 30% MoM. Compared to February, producer prices declined by 0.8% in March 2023. This was the fifth consecutive month of monthly price declines in manufacturing. Prices in the energy and power generation section also fell markedly (-3.4% MoM).

The next few months will bring a continuation of PPI disinflation, and producer prices should rise at a single-digit pace as early as April. PPI inflation has risen noticeably more strongly than CPI, and the same will be true in the reversal phase, i.e., the decline in producer inflation will be considerably more dynamic than in consumer prices.

Despite the strong deceleration of the economy and the disinflation trend that has begun, we do not share market expectations for interest rate cuts before the end of this year. The trajectory of core inflation points to strong persistence in price increases, which will require interest rates to remain at their current high levels for an extended period of time. It is noteworthy that in recent weeks the National Bank of Poland has changed its rhetoric and retreated from earlier declarations of readiness to ease monetary policy before the end of 2023, which would have been premature. In our view, the first NBP rate cuts will take place at the end of the third quarter next year.