Losing some momentum

A series of economic data releases over the past weeks suggest that Poland’s economy begun to slow down in the second half of 2018. September saw a deceleration in output and domestic trade growth and October saw the continuation of declines in several surveys of business and consumer confidence that began in Q3, indicating the potential for a further moderation in Q4. In particular:

  • ·Seasonally and calendar-adjusted industrial production contracted by -0.7% m/m in September, the first m/m decline since April 2013, taking output growth in Q3 to +5.9% y/y, a marked slowdown from +6.8% y/y in Q2.
  • Similarly, seasonally and calendar-adjusted real retail sales decreased by -0.6% m/m in September, after -0.7% m/m in August, taking the y/y growth rate in Q3 down to +6.1% from +7.2% y/y in Q2.
  • The Manufacturing PMI fell to 50.4 points in October (from a recent high of 54.2 in June), a two-year low. Notably, the decline in new export orders that began in August continued in October, with firms highlighting weaker demand from Germany. This is mirroring a sharp drop in German auto production due to major problems with the certification of cars according to a new emission test procedure.
  • The overall Economic Sentiment Indicator published by the European Commission fell to 106.8 in October, the lowest level since December 2017, though it remained above its long-term average of 99.0 points. Its five sub-indicators all declined as well but remained above the long-term averages:
    • The Industrial Confidence Indicator fell to an 11-month low of -6.0.
    • Construction Confidence decreased to a two-month low of -8.4.
    • Services Confidence declined to a 10-month low of 4.5.
    • Retail Trade Confidence fell to a 17-month low of 4.5.
    • The Consumer Confidence Indicator decreased to an 11-month low of -1.7.

Overall, these high frequency indicators signal that very strong economic growth in the five quarters until Q3 2018 (+5.2% y/y on average) will give way to a more moderate but still robust performance until end-2019. We expect real GDP growth to ease to +4.2% in Q4, resulting in full-year growth of +4.9% in 2018 (after +4.7% in 2017), followed by +3.5% in 2019.

Labor market overheating is retreating

The strong growth performance in Poland since 2014 has been accompanied by a tightening labor market, reflected in rapidly declining unemployment, firm employment growth since 2016 and strongly rising wages since 2017. For some analysts this had raised concerns of an overheating economy, even though inflation remained subdued – headline inflation stayed well below the Central Bank’s 2.5% target and eased to 1.8% y/y in October while core inflation has remained below 1%.

Meanwhile, employment growth has lost some pace, decelerating from a peak of +4.6% y/y in December 2017 to +3.2% in September 2018. Moreover, nominal wage growth has moderated from a high of +7.8% y/y in April 2018 to 6.7% in September. The unemployment rate has further fallen to 5.7% in September and is expected to continue to do so until levelling off between 4% and 5% in 2019. All in all, this implies that the labor market has begun cooling.

Monetary policy remains accommodative

The Polish zloty (PLN) has remained fairly resilient to earlier overheating concerns and global headwinds. It has lost -3% in value against the EUR in 2018 year-to-date, but only -0.7% since end-July, meaning that the currency crises in Argentina and Turkey have not had any significant contagion effects.

Against the background of relative price and currency stability, the National Bank of Poland has maintained a loose monetary policy stance to date, keeping its key policy rate at 1.5%, unchanged since March 2015. We expect gradual monetary tightening to begin in 2019, in line with ECB tightening as well as to fend off potential downward pressures on the PLN in the wake of the expected slowdown in economic growth.