Poland’s economic growth

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.

> 20182019US annualeconomic growth2.9%2.3%Eurozone annualeconomic growth1.9%1.2%Statistics Poland’spreliminary estimate of GDP5.1%4.0%Private consumption growth4.3%3.9%Investment growth8.9%7.8%

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.

20182019The lowestunemployment rate (10.2019)5%Employment dynamicsin the enterprise sector3.5%2.6%Wages increasein the enterprise sector7.1%6.4%

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.