Economic news

• INTEREST RATES: According to Ludwik Kotecki, Polish Monetary Policy Council will refrain from cutting interest rates in July due to global factors but might ease monetary policy in September. This matches our forecasts. Last week the NBP released the latest results of its macroeconomic survey. Using the one-year-ahead expected inflation from the survey, we can calculate ex ante real interest rates. Under this metric, monetary policy was eased in Q2 for the first time in 3 years. However, real interest rates are still in restrictive territory (2.25%).  
• PRICES: According to the flash estimate, CPI inflation rose from 4.0% in May to 4.1% yoy in June, a bit above market consensus. We judge that core inflation was the culprit as it accelerated from 3.3% yoy to 3.4%. However, we consider this as a one-time deviation from the prevailing downward trend. A more comprehensive comment on this figure will be released later today. Additionally, last week prime minister Donald Tusk announced that retail electricity price freeze will be extended until the end of the year. We had already assumed so and this takes the risk of Q4 jump in inflation off the table.  
• RETAIL SALES: Retail sales rose by 4.4% yoy in May, in line with market consensus. There has been some material deceleration from April’s exuberant +7.6% yoy, but we can safely attribute that to fading Easter effects which allowed food sales growth to normalize after the March-April period. Durable goods sales remained strong and grew at their fastest pace in three years. A more in-depth dive into retail sales data can be found here.  
• MONEY: M3 rose by 10.3% yoy, in line with expectations. There are a few takeaways from otherwise second-rate dataset. First, lending to corporates is accelerating (5.6% yoy, FX-adjusted), as does lending to households (3.1% yoy). Second, money supply continues to be driven to a large extent by government debt issuance – its contribution rose by more than 30% yoy for the second month in a row. All in all, we believe that credit demand is already boosted by recovering investment.   
• BUDGET: The Ministry of Finance is working on a tax on reserves held by banks at the NBP and expects to raise PLN 1.5-2.0 bn next year, MoF Andrzej Domański said.  
• DEBT: The Ministry of Finance sold PLN 10.6 bn worth of government bonds of five series (the figure includes the supplementary sale). Demand was strong this time, exceeding PLN 14 bn. As a result, the MoF already financed 74% of this year’s gross financing needs, the Ministry said in a statement. Last week BGK also sold a small amount of FPC-series bonds worth PLN 342m.  

Polish GDP likely accelerated in Q2

Last week, industrial and construction production data for May were published. This time there were no major surprises: industrial production rose by 3.9% yoy and construction production fell by 2.9% yoy. The consensus indicated an increase of 4.2 and a decline of 3% yoy, respectively. Thus, with retail sales data published last week as well, we already have hard data on the 2/3rd of the quarter. It is tempting - following the example of sports commentators - to start summarizing it. In the case of industry, the expected result for the second quarter is an acceleration from -0.1 to about 2% yoy, in the case of construction it is a deceleration from 0.9 to approx. -2% yoy - these averages out to the second-best quarter since the beginning of 2023. Thus, the likelihood that GDP accelerated in Q2 is high – we estimate GDP growth to amount to 3.5% yoy. Nevertheless, one should not lose sight of the fact that we are still talking about relatively low growth rates in the two aforementioned sectors, clearly below the pre-pandemic average.

Average industrial and construction output growth (% yoy)

Source: Statistics Poland, Pekao Research

Two questions have been of interest in industrial production for some time: whether the sector as a whole has broken out of years of stagnation, and what the structure of production in recent months tells us about economic growth and its drivers. The answer to the first question is still no - the level of production is below the 2022 average, although May was the third consecutive month of mom increases in production. As we have mentioned in previous commentaries, it will take a few more good months in manufacturing for us to be able to declare the end of stagnation with a clear conscience. The structure of production growth for the past few months has been interesting in our view, with the best performing sections supplying investment demand - they are currently growing at double-digit rates on average. The output growth of industries supplying private consumption is quite low, but has been stable for several months, if we filter out fluctuations related to seasonal and calendar factors. Finally, a positive note in recent months is the acceleration in export industries. We don't know to what extent we can attribute it to rushing production before the introduction of higher tariffs in the US, but we can't rule out that this factor had a noticeable impact.

Industrial output growth broken down by main destination (% yoy)

Source: Statistics Poland, Pekao Research

Finally, a word about construction production. May did not change much in the picture of the sector - the level of production has remained basically unchanged for several months and its structure (for now we know only the most coarse one) indicates the continued weakness of building construction (residential?) while specialized construction activities are booming as a prelude to the investment eldorado. The two effects balance each other almost perfectly.

Construction output, main categories (12m sum, bn PLN)

Source: Statistics Poland, Pekao Research

Financial market update

No major changes on Friday, but this quiet day crowns a week marked by declines in SPW yields and IRS rates, mainly related to global trends and a temporary reduction in the supply of new paper. What comes to the fore in these circumstances is domestic monetary policy (July MPC meeting and new NBP projection) and the most important factor for it, i.e. inflation (publication scheduled for today). The divergence we described between market valuations and the rate path implied by the MPC's communication has narrowed significantly but still exists. Markets see a non-zero probability of a rate cut at the July meeting and expect between 3 and 4 cuts by the end of the year. In our view, this is too much - when the Council signals that it will deliver two more, you have to believe it.