Poland: War lifts prices but impact on the economy is moderate so far

Industrial output increased by 13.0% year-on-year in April (ING: 15.5%YoY; consensus: 15.4%YoY) after growth of 17.3%YoY in March. Seasonally-adjusted output moderated by 0.4% month-on-month, in what may be a sign of the first hits from the war in Ukraine and the reported decline in new orders. However, the scale of the impact is moderate so far. Robust growth was reported in heavy industries: mining, manufacture of coke and refined petroleum products, as well as metals and metal products.

Producers’ prices (PPI) jumped up by as much as 23.3%YoY last month (ING: 18.5%YoY; consensus: 20.4%YoY) after a 21.9%YoY increase in March (data revised upwards). The commodity shock (particularly energy sources) is still visible in the data. Prices in electricity, gas steam and air conditioning supply rose by 44.0%YoY, while prices in mining and quarrying were 29.3% higher than in April last year. In the case of manufacturing, the highest price increase was reported in the manufacture of coke and refined petroleum products (90.3%YoY). High price growth was also seen in the manufacture of metals (37.9%YoY). Price growth in food processing also gained momentum (23.9%YoY). The upward trend in PPI points to a continuation of consumer inflation growth in the coming months and the strong second-round effects we have pointed out for some time.

Average wage and salary in the enterprise sector rose by a hefty 14.1%YoY in April (ING: 12.6%YoY; consensus: 12.6%YoY), while average paid employment increased by 2.8%YoY (ING and consensus at 2.7%YoY). Wage growth indicates very strong wage pressure and confirms a wage-price spiral. At the same time, a monthly increase of more than 10K employment in monthly terms is a solid result for April.

The Polish labour market remains tight and many sectors have reported labour shortages. Mounting labour costs are part of a wider range of intensifying second-round effects. Previous increases in the price of energy, materials, transport and labour generate upward pressure on costs that are passed onto the retail prices of goods and services. In the environment of a consumption boom, additionally boosted by fiscal expansion (tax cuts, 14th pension etc.), higher prices do not trim demand. Sharp increases in prices of necessities (food, fuel, housing) translate into mounting wage demands. The labour market remains reliant on foreign workers (immigrants).

Today’s dataset clearly highlights that the price shock caused by the war accelerates than subsides, which is accompanied by more evidence of a wage-price spiral (stronger increase in wages and sound employment). The risk of inflation slipping out of control rises. Hence the data increases the odds of a 100bps hike in June or a series of 75bps hikes in the coming months. We will follow Monetary Policy Council (MPC) comments, looking for signals on whether the Council is focusing on high PPI and wages, or slowing production. We fear that the GDP slowdown in the coming quarters won’t be sufficient to curb CPI given the tight labour market and fiscal expansion.

We expect a GDP slowdown in 2H22, but the starting point from 1Q22 is so high that the annual GDP growth should average around 4.5% this year. We still see CPI topping around 15-20% YoY.

Persistently high CPI is currently a much more serious threat than the GDP slowdown. An inconsistent policy mix (loose fiscal policy, tight monetary policy) only amplifies that risk. The MPC should hike rates to no less than 7.5-8.5%.