Economic news

• INDUSTRY: Industrial output surprised to the upside for the first time in a few months, having grown by 1.2% yoy (consensus called for a small decline in yoy terms). While it is too early to call an end to multi-year stagnation of the sector, there are encouraging signs in the details of the release. The full comment to the data can be found here.
• CONSTRUCTION: Construction output disappointed again, having declined by 4.2% yoy in April, below market consensus of -1% yoy. The details of the release are sparse, but we believe that the rollout of infrastructure and other public investment is slower than anticipated. It is also offset by weak residential investment – April data showed deepening declines in both housing starts and permits. New supply is hitting the market right now and is not replaced by newly launched projects.
• SENTIMENT: Business and consumer sentiment improved slightly in May, according to Statistics Poland. However, the levels of both indices are well within the range prevalent over the past two years – both are consistent with moderate economic growth.
• LABOR MARKET: Some signs of resilience in two major releases for April. Employment declined by 0.8% yoy, less than anticipated (-0.9% yoy), with details suggesting that the period of job shedding is coming to an end. Wage growth surged to 9.3% yoy (market consensus at ca. 8% yoy) on the back of Easter effects and bonus payments. The data will probable be interpreted by the MPC as a reason for caution. The full comment to the data can be found here.
• RATES: According to Przemysław Litwiniuk, upside risks to inflation are growing and that raises the likelihood that the next interest rate cut will occur in the autumn, not the summer (i.e. not in July). However, if the right conditions are met then, the Council might entertain a bigger adjustment instead of a series of standard ones (25 bps).
• BUDGET: Polish local governments have posted an earth-shattering surplus of PLN 41.3 bn in Q1’25. This, of course, is the result of local government finance reform, which transferred additional tax revenues from the central government budget. We believe that this windfall will translate into higher investment spending. This process seems to already be in motion – local government investment spending rose by 11% yoy in Q1 already and leading indicators suggest they will accelerate in the coming quarters. The Ministry of Finance also reported that VAT gap declined from 13.5 to 6.9% in 2024 – this matches both our intuitions (VAT revenues rose much faster than nominal GDP, even accounting for the return of 5% rate on food) and the long-standing pattern in which the gap declines as GDP accelerates because of higher incentives for compliance.
• DEBT: Last Thursday, the Ministry of Finance sold PLN 9.2 bn of government bonds, with demand reaching PLN 11.7 bn.
• MONEY SUPPLY: M3 rose by 10.4% yoy in April, surprising to the upside. We take a detailed look into recent data on money supply and credit in the next section.

The first green shoots on the credit market 

April's readings from the real economy did not inspire optimism: deceleration in housing was responsible for a 4.2% yoy drop in construction output, raising concerns about a weaker contribution of investment to this year's economic growth; industrial production also remained stagnant, decelerating from 2.4% yoy in March to 1.2% yoy in April. Last week, meanwhile, closed with an unexpectedly good reading of money supply: the growth rate of the M3 aggregate accelerated from 10.3% yoy in March to 10.4% yoy in April, despite the fact that both we and the consensus average expected a deceleration to single-digit growth rates. In today's text, we look at detailed data from the National Bank of Poland on the structure of monetary aggregates and the monetary balance sheets of financial institutions, and argue that the optimistic forecasts for the credit market for 2025 are now coming into play. 

End of declines in mortgage volumes, slight rebound in investment loans

April was the last month in which the NBP reference rate remained at 5.75%. Nonetheless, a dovish turn in the rhetoric of the NBP President, as well as gradual progress in contracting investment funds from the RRF (as we wrote recently, PLN 100 billion of the approximately PLN 270 billion in funds earmarked for investment has already been contracted) translated into an improvement in the credit market.

Volume of household loans – selected categories (%yoy) 

Source: NBP, Pekao Research 

First of all, it should be noted that the decline in the dynamics of the volume of PLN mortgages, which decreased from 9.5% y/y in October last year to 6.5% y/y in March this year, and remained at the same level in April, has stopped. In view of this, we are of the opinion that starting in May - due to, among other things, the NBP's interest rate cut - we should see a re-acceleration of mortgage volume dynamics, especially since the BIK's March data on new sales already indicated a high growth in newly issued home loans (PLN 7.7 billion/month compared to 5-6 bn in the previous months). This suggests that achieving full-year housing loan volume growth of 9.8% y/y, which is in line with our forecast, will not be a challenge. Stable growth is also shown in consumer loans (6.1% y/y in April, the most since the COVID-19 pandemic), driven by resilient labor market and strengthening households' propensity to consume.

Volume of corporate loans – selected categories (%yoy) 

Source: NBP, Pekao Research 

Also worth noting are the first signs of an investment rebound coming from a range of corporate loan volumes. The value of the corporate investment loan portfolio was still growing at 5.2% yoy at the beginning of the year, then fell to 4.0% yoy and stabilized there, but April already showed an acceleration to 4.4% yoy. The deceleration in 1Q25 remains consistent with the weak readings from the real economy, indicating some delay in the realization of the rebound in investment in Poland. In view of this, we have decided to revise our growth rate for this loan segment to 7.5% yoy this year vs. 5.8% yoy in 2024. However, we think that the positive response of the private sector to this year's wave of RRF-funded transformational investments will help boost corporate investment credit growth to double-digit levels as early as 2026.

Expansionary fiscal policy contributes to inflate bank balance sheets

Finally, it is worth noting that data on the factors of money creation clearly indicate the expansionary nature of fiscal policy. The share of net government debt in M3 money creation is growing dynamically, approaching the scale known from the COVID-19 pandemic. This is a natural consequence of prolonged high fiscal deficits, covered prima facie by the issuance of wholesale bonds to the domestic market.

Liabilities of central government institutions towards banks (%yoy) 

Source: NBP, Pekao Research 

The contribution of the value of liabilities contracted by central state institutions to the money supply dynamics amounted to 5 percentage points in April, the highest since February 2021. At the same time, the nominal value of these liabilities themselves grew at a rate of 31% y/y, the highest since late 2020. This means a growing exposure of the domestic banking sector to the risk of volatility in the valuation of Polish government debt - should the NBP be forced to raise rates again in the future (if only due to inflationary pressures from restrictive US trade policy), the high share of government bonds on Polish banks' balance sheets could expose them to balance sheet losses (via other comprehensive income) and thus reduce their willingness to lend).

Broad money supply – asset breakdown (% yoy) 

Source: NBP, Pekao Research 

Financial market update

The environment for Polish assets will not be favorable this week. While Poland is not heavily exposed to the risk of trade wars, the renewed escalation of these wars does not encourage investment in emerging markets. There is also local political risk associated with the presidential election with difficult to predict outcome and consequences. Third, the fiscal situation in our country remains difficult, especially since the Monetary Policy Council has again become a bit more hawkish. All this, as well as technical analysis, supports a further increase in Polish government bond yields in the coming week. At the same time, we do not expect large movements on the zloty, but if there are any it will be in the direction of weakening. Macro data (e.g., today's retail sales) will be of secondary importance for the markets - political risks are much more important for them at the moment.