Poland: GDP slowed in 3Q amid lacklustre consumption

Household spending remained the key growth driver in 3Q, rising by 3.9% YoY (down from 4.4% in the second quarter). An extension of the 500+ child benefit programme had a limited impact on spending. More demand might be seen in the fourth quarter (as the benefits were paid out only partially in 3Q), but data on deposits suggests increased savings. In 2016-17 the introduction of this benefit (for second and further children) had a stronger impact on consumption. Benefits were paid out to larger, less affluent families. Now benefits are paid for the first child as well.

Investment growth slowed to 4.7% YoY from 9.1%. This reflects weaker public outlays, e.g. by local governments, which lost revenue after the Personal Income Tax rate cut. Private investments slowed to 5% YoY from a robust 14.3% in 1Q. A recovery in private investments was delayed in this cycle, with internal and external uncertainty apparently capping spending.

Net trade added 0.8 percentage points to GDP growth. Typically during economic slowdowns in Germany, Polish exports outpace imports, which is likely because Polish products are more price-competitive. Moreover, internal demand in the euro area remains strong in this cycle, helping central and eastern European exporters. In addition, imports have been capped by only moderate internal demand in Poland. Still, the manufacturing slump in Germany has had a negative impact – value added in industry slowed to 3.4% YoY from 4.4%.

We expect 2019 GDP growth at 4.2% YoY and 3.3% next year. Our 2020 forecasts are below both the National Bank of Poland's estimates and the consensus, supporting our call of flat interest rates despite an expected rise in consumer prices next year.

Weaker consumption and investments is positive for Polish government bonds. Deposit growth significantly outpaced credits in 3Q and this trend should persist in the remainder of the year. Hence, local banks face over-liquidity and are forced to buy local debt to avoid the asset tax. We estimate that their net purchases of POLGBs next year will be higher than net issuance (we estimate at PLN15 billion).

According to the flash reading, CPI increased in November to 2.6% YoY from 2.5%, in line with the market consensus. The increase was related mainly to food prices. We estimate core inflation increased to 2.5% YoY from 2.4%.

We forecast that today’s reading is the beginning of a new upward trend in inflation. The December figure should be around 3% YoY as base effects suggest an increase in fuel prices and food prices have stabilised at a stronger level. Core inflation is expected to increase slightly to 2.6% YoY.

We expect CPI to peak in 1Q around 3.5% YoY. Core inflation should remain a major contributor, fuelled by demand pressures and an increase in labour and energy costs for enterprises. A strong hike in the alcohol and tobacco excise tax should add another 0.3 percentage points to the headline rate. The biggest uncertainty is related to energy prices for households – so far there has been no legislation regarding prices in 2020, but the government has said it will freeze prices at the 2019 level.

Inflation should return to the central bank target (2.5% YoY) in the second half of 2020 due to a lower contribution from food prices. The growth structure should rely solely on core inflation. Such a situation suggests there is a risk of overshooting the inflation target's upper band (CPI above 3.5% YoY) in the event of external or domestic supply shocks (e.g. weaker crops, disruptions on the global oil markets).