The economy was slowing down in 2019. The largest economies of the world were affected by significant GDP growth lowdowns, and were even on the brink of recession. Weak market conditions can be due to upheavals in global trade, but also weaker investing activity and lower domestic consumption. Annual economic growth according to Bloomberg data in 2019 in the US fell from 2.9% y/y to 2.3% y/y, and in the Eurozone from 1.9% y/y to 1.2% y/y.

GDP growth in Poland, which in 2018 stood at more than 5%, has lowered, but still remained above potential in 2019. The high momentum of the national economy kept going mainly in the first six months of the year, and saw growth restriction by the end of the year. According to Statistics Poland’s preliminary estimate, in 2019 GDP grew by 4% y/y as compared to 5.1% y/y in the prior year, which is slightly less than the market consensus. It is notable, however, that against the background of weak Europe and moderate growth in the US, Poland’s economy proved to be quite resistant to a significant global slowdown.

The biggest effect on economic growth in the last year was still exerted by private consumption, responsible for as much as almost 57% of GDP growth. Private consumption was growing, according to preliminary estimates, at 3.9% y/y, albeit it was lower than in 2018 (4.3% y/y). Consumption was supported by excellent condition of the labour market. The unemployment rate in 2019 fell to record lows of 5%, employment grew at a stable, although slightly slower pace, and wages grew faster than the overall economy. Moreover, household income was supported by tax cuts and a new stage of the “Family 500 Plus” social welfare package, as well as continued optimistic consumer outlook. Low interest rates and the related low credit cost also supported domestic demand. However, growing inflation reduced real incomes, which reduced consumption, in particular toward the end of the year. We estimate that in Q4 2019 the growth of household consumption decelerated from 4% y/y in the same period of 2018 to about 3.4% y/y.

The second largest component of economic growth – investment – grew in 2019 by 7.8% y/y against 8.9% y/y in 2018. Businesses were increasingly worried about uncertainty related to the expected domestic and foreign demand, as well as worker shortages in the labour market and a slower growth of absorption of European Funds at a later stage of EU’s 2014-2020 Financial Perspective. Nevertheless, preliminary estimates by the Statistics Poland (GUS) concerning annual investment dynamics allow us to estimate that in Q4 2019 the investment rate could accelerate again to even more than 7% y/y.

In 2019, the contribution of net exports to the GDP remained positive, although later in the year there was a significant influence of global downturn, including in our largest trade partners, and in Q4 2019 net exports probably had negative contribution to the GDP following three quarters of the year of slightly positive impact on growth.

Continued stable domestic consumption with moderate investments and slightly negative impact of the foreign trade balance according to Statistics Poland’s (GUS) flash estimate resulted in the growth of the Polish economy in Q4 2019 of about 3.1% Y/y against 4.9% y/y in the same period of 2018.

GPW dynamics

*/Source: Statistics Poland’s (GUS) and in-house projections by DAM Alior Bank S.A.

Perspectives for the Polish economy in 2020, despite the expected slightly lower growth rate than last year, look quite good. The growth should be still driven by private consumption, although the fact of its slowing down at the end of 2019 suggests stronger households’ response to lower disposable income due to higher inflation rate.

In 2020, it will be visible in particular in the areas more affected by inflation, such as services, than goods purchases, because the most recent goods retail figures show stable dynamics. In the coming months, due to the forecast higher inflation dynamics and lower growth of employment and wages, reduction of consumer disposable income may progress. Hence, private consumption should note slightly lower growth dynamics. Yet, on the business side, in turn, the progressing economic slowdown abroad and the running out of funds from the EU budget, translating into the results on manufacturing and construction&erection activity towards from the end of last year, allow cautious investment estimates. Business will be also held back by persistent shortages of labour, although slightly less than the year before. We expect that in 2020 economic in Poland will slow down the growth towards 3% y/y.

Situation in the labour market

Stable economic growth, staying at 4% on average, stimulated labour demand. Throughout the period, employment was growing, and unemployment rates were falling, reaching in October the lowest figure in the history of such measurements, at 5%. Towards the end of the year, the rate managed to grow near to 5.2%, which partly resulted from weakening employment growth in the enterprise sector from 3.5% y/y in 2018 to the average of 2.6% y/y in 2019. Insufficient supply of workers in the labour market, at stable GDP growth, translated into growing wages and unit labour costs, stimulating the growth of expected inflation and slight lower margins of businesses. Wages in the enterprise sector had been rising in last year by 6.4% y/y versus 7.1% in 2018. The growth of wages was depressed by growing number of workers from abroad, including mainly from Ukraine, and growing workforce productivity. In real terms, average annual growth of wages, due to growing inflation, slowed down from 5.5% y/y to 4.1% y/y.

Over the next quarters of the year, high workforce costs will continue to affect to the growth of the private sector and hold back private investment projects, which may eventually slow down the economy. Lower economic growth will, in turn, affect demand for labour and reduce the employment growth, which, in some part, will compensate for labour shortages and reduce the pay rise pressure, thus reducing inflation expectations. However, pay rises will be probably supported by the rise of minimum wages, which will be an argument for higher pay claims in the entire labour market. In such circumstances, employers will be, on the one hand, inclined to shift the higher labour costs to final recipients, but, on the other hand, they may seek ways to increase efficiency and automate their operations, which may trigger a slight reduction in FTEs. The unemployment rate in 2020 should slightly rise, but not exceeding 5.5%.

GDP dynamics and unemployment rate

Inflation

Rising prices were the hallmark of 2019, although the initial six months of the year featured relatively moderate inflation. Price rises were restricted by low inflation in the Eurozone and upheavals in international trade which held back global growth and, consequently, prevented commodity prices from rising. Thus, the main inflation categories, such as prices of transportation or energy remained moderate. In 2019, transportation prices grew at 0.7% y/y vs. 4.3% in the prior year, and the segment of residential consumption and energy utilities rose by 1.5% y/y vs. 2.1% in the same period the year before. The middle of the year clearly marked rising food prices due to disturbances in the pork market due to ASF epidemic in China. At the same time, rising labour costs contributed to the tendency of transferring these price rises on to the final consumers. By the end of the year, this trend was already very clear, and at the same time, new inflation pressures became increasingly prominent, such as the projected minimum wages rise and expected power price rises, in addition to the expected waste disposal price hikes or rising excise tax on tobacco and alcohol, which, although to be introduced in 2020, stimulated inflation, including the core inflation, already at the end of 2019. Consequently, consumer inflation, which was below 1% y/y in January, went up to 3.4% y/y in December, the highest level since October 2012. Throughout the entire 2019, average annual inflation rate reached 2.3% y/y vs. 1.7% y/y in 2018.

Moderate average annual price rises in 2019, which did not exceed the inflation target of the Monetary Policy Council, and lower economic growth, justified stabilisation of monetary policy. The Monetary Policy Council kept interest rates at a constant level since March 2015, including the reference rate at 1.50%. The NBP’s current inflation projection expects that inflation will grow in 2020 to about 2.8%, i.e., slightly above the inflation target of 2.5%, and will return near that target in 2021. Nevertheless, the November projection does not take into account some one-off factors contributing to inflation since the beginning of the year, which will provide an argument for increasing the projections in the subsequent rounds.

In our opinion, price rises will continue in the subsequent months. The above-mentioned price rises of power, municipal waste disposal or alcohol should temporarily increase inflation, which in Q1 of the year may significantly exceed 4% y/y, and the annual average may be even 3.5%, which means that the range of deviations for inflation (+/- 1%) set by the Monetary Policy Council would be temporarily exceeded. In the next quarters of the year, increasingly prominent maybe arguments for curbing price rises, such as slightly lower pressure from the labour market, where a lower employment rate and at the same time a slight increase in unemployment rate are expected. In addition, lower GDP growth and low inflation in Poland’s neighbourhood will exert a downward pressure on this ratio. What’s more, following a jump rise of food prices in 2019, the high-base effect will influence food price rises over this year. These factors will reduce pressure on interest rate increases by the Monetary Policy Council despite inflation growth, which makes it likely that monetary policy will remain stable in the subsequent years.

Situation in foreign trade

According to NBP figures, Poland’s foreign trade, despite lower volumes of global trade in Q2 and Q3 of the last year, increased in 2019 to PLN 988.0 billion in exports and PLN 977.4 billion in imports (current prices). Trade balance was thus positive at PLN 10.6 billion, as compared with PLN 20.4 billion in 2018. Compared to 2018, exports increase by 6.9%, and imports by 3.4%. Lower exports dynamics against 7.6% y/y in 2018 may be considered moderate in the face of a marked economic slowdown in Poland’s main trade partners, including in the Eurozone and in Germany. Imports rise slowed down more prominently, from 10.7% y/y in 2018, mainly due to suppressed domestic demand in the second half of the year and against high base prices of fuels and commodities in 2018.

According to Statistics Poland’s data, in the period reviewed here, EU countries have remained the main trade partners of Poland. Despite economic slowdown throughout Europe, Polish companies managed to increase their exports to their main partners of the Old Continent, but these dynamics were largely lower than the year before. Exports to Germany grew by 4.2% y/y, to the Czech Republic by 2.2% y/y, to the UK by 2.3% y/y, and to France by 11.6% y/y. At the same time, the exports structure saw attempts at diversifying trade partners and the share of EU countries fell from 80.6% in 2018 to 79.8% in the same period of 2019. Among importers, the significance of developing countries, mainly due to China, grew from 25.2% to 26.6%, and the significance of the Eurozone fell from 47% to 45.8%.

Global economy

Gridlocks in international trade caused by trade wars waged under US leadership set their stamp on the global economy last year. Lower dynamics of global demand, in particular of investment demand, accompanied by rising uncertainties regarding the prospects for global economy contributed to lower activity in the manufacturing sector. Economic slowdown was experienced not only by China, the main target of US policies, by also Europe. As expected in free market economy, deteriorated trade conditions also affected US economy. As a result, global growth markedly slowed down from 3.6% in 2018 to estimated 2.9% in 2019 Lower global GDP growth was accompanied by still moderate inflation, supported by stable prices of commodities in financial markets.

In 2019, GDP dynamics were still falling in the Eurozone, although slightly slower than the year before. Economic growth, which was 1.4% y/y in Q1 of the year, by the end of the year reached the mark of approx. 1% y/y. Domestic demand, including private consumption, remains the biggest contributor to growth in the Eurozone and the investment outlook has deteriorated due to uncertainties among the business community as to how the economy will look like in the future and due to upheavals in international trade. Last year, even the biggest EU economy – Germany – coped with significant GDP slowdown, in Q2 being on the brink of recession (GDP growth of only 0.3% y/y). This coupled with quite low inflation as for this phase of business cycle, which in 2019 averaged 1.2% y/y in the Eurozone (significantly below the 2% of the ECB inflation target), spurred the ECB to return to its accommodative monetary policies. In addition to keeping the main interest rate at zero and deposit rate reduced by 10 basis points to -0.50%, the bank restored its asset buyback operation (QE) at EUR 20 billion per month. At the same time, the ECB announced that its main interest rates would remain at the current level for a longer time, thus keeping in place negative real interest rates in the Eurozone.

Mutual customs tariffs introduced throughout the year by China and the US significantly increased the cost of mutual trade, which was not without effect on US economy. GDP growth at 2.7% y/y in Q1 2019 was only 2.3% y/y in the last quarter of the year. Like in the Eurozone, growing consumption was the main driver of growth, supported by rising employment and wages, as well as growing household disposable income due to increasing prices of financial assets. Unfortunately, investing activity was increasingly weak in each subsequent period, and investment dynamics deteriorated due to companies’ concerns about future orders, higher customs tariffs and more problems with finding workers. Wage increase pressure remained, however, moderate, which, coupled with moderate global commodity prices triggered inflation for most of the time not exceeding 2% – FED’s inflation target. Nevertheless, weakening economic growth persuaded the FED in the second half of the year to return to its monetary easing policy and reduce interest rates by a total of 75 basis points, from the 2.25-2.50% range to 1.50-1.75% and to end the reduction of the balance sheet

In the coming quarters, growth in the largest developed and developing economies should be slowing down, although the January preliminary trade agreement resolving some key issues between the US and China provides hopes for less pronounced global slowdown at the turn of 2021.

Exchange rate

Financial markets in 2019 were dominated by volatility. On the one hand, investors increasingly feared global economic slowdown, and, on the other, they eagerly responded to a breakthrough in trade wars and China and the US sitting at the negotiation table. In anticipation of trade agreement, risky assets gained, which increased pricing in stock and currency markets from the EM basket. The return of globally important central banks to monetary stimulation out of concern for economic prospects also pushed up the sovereign debt, in particular over the first half of the year. In currency markets, the last year slightly favoured the US dollar due to somewhat more favourable setup of economic parameters than the Eurozone, including, in particular, higher growth rate, which brought about a fall in EUR-USD rate by 2.2%, down to 1.12. In addition, in the Eurozone, persistent uncertainty regarding the political situation in the UK and Brexit negotiations adversely affected the common European currency.

A stronger US dollar in the year clearly pressed heavily on the currencies of emerging economies, including the zloty. The central banks’ way back to action and growing expectations regarding the trade agreement to be signed, contributed to certain respite at the end of the year, which, on the annual scale, provided for quite neutral picture of zloty prices, additionally supported by favourable domestic economic situation. As a result, the zloty lost 1.5% to the US dollar, but gained 0.8% versus the euro, reaching at the end of the period 3.79/USD and 4.25/EUR, respectively.

EUR/PLN and USD/PLN rates against CPI inflation and reference rate