Economic news

• INDUSTRY: New industrial orders surged by 143% yoy in May, the biggest one-time increase in history. It is not a terribly useful statistic, though. Historically, it wasn’t leading industrial output and its correlation with output was tenuous. This time, we have a pretty good idea of what caused this surge: defense orders related to SAFE funding. These are going to be filled for years to come. One shoudn’t expect a prompt increase in output.
• TRADE: Retail sales accelerated from 1.3 to 3.0% yoy in May, matching consensus and our forecast. The details of the reading are hardly surprising. The structure of retail sales is normalizing following large swings in the previous month. Looking ahead, even though the impact of the Iran War is less severe than feared a couple of weeks age, consumption is still expected to slow down. A more detailed comment can be found here.
• LABOR MARKET: Has not turned around. Wage growth accelerated from 5.4% in April to 5.8% yoy in May (a small miss vis-à-vis the consensus of 6.0% yoy), mainly on the back of low base and bonus payments in mining. On the other hand, cyclical sectors (construction and industry) disappointed. Employment growth stabilized at -0.9% yoy. A more detailed comment on wage and employment data can be found here. Statistics Poland also released official unemployment figures last week – the slight decline in unemployment rate (from 6,0 to 5.9%) is fully in line with expectations and seasonal patterns.
• CREDIT: Money supply slowed down in May from 11.3 to 1.0% yoy, undershooting forecasts (11.4% yoy). Surprisingly, local government funds have not undergone their usual spike in May, growing at 2.8% mom instead of approx. 5%. From the perspective of the money creation processes, though, the image remains pretty stable: net foreign assets and central government debt remain key contributors to the M3 growth. Eventually, looking at the credit aggregates, we have observed this year’s record in mortgage credit growth (9.5% yoy) with corporate credit consistently expanding at a 2-digit pace.
• DEBT: The Ministry of Finance sold PLN 12 bn worth of bonds, at the upper end of target supply range. The demand was solid, at PLN 15.4 bn. This has been the second successful bond sale in a row. Following the auction, the Ministry nas filled 62% of this year’s gross borrowing needs.

Not a lot of inflation is going to come out of this crisis

In early May, we published an analysis in which we outlined the potential impact of the fuel shock on the inflation path in Poland and the mechanism through which it would be transmitted to the economy. We noted at the time that if high oil prices persisted, inflation could rise by as much as approximately 2 percentage points compared to earlier projections through the end of 2026. However, this scenario was based on the assumption that there would be no significant progress in resolving the U.S.-Iran conflict and that the market price of crude oil would remain around $100 per barrel for an extended period.

Today, at the end of June, we already know that these assumptions are no longer valid. The likelihood of de-escalation has clearly increased, and shipping through the Strait of Hormuz is gradually normalizing, though it has not yet reached full capacity. Commodity markets also reflect this improvement in sentiment. The price of Brent crude has fallen to around $75 per barrel, which is nearly the same as the levels seen before the conflict broke out.

Let’s return to the inflation outlook in Poland. The mechanism for the transmission of the fuel shock that we outlined in our earlier analysis assumed that within 3–4 months, the impact would be directly visible at gas stations and in industries whose operations are heavily dependent on fuel costs, such as transportation services (particularly air travel) and package holidays. This is exactly what happened. These two categories alone accounted for nearly 65% of the acceleration in core inflation between February and May. During that time, prices for international airline tickets rose by over 30% s.a., pushing core inflation up by 0.12 percentage points. Meanwhile, package holiday prices raised it by another 0.25 percentage points.

Decomposition of Feb-May increase in core inflation (yoy, pp.)

Source: NBP, Statistics Poland, Pekao Research

For other categories in the inflation basket – that is, goods unrelated to transportation, food, or other services – the impact of the fuel crisis was too short-lived, and its effect on their prices will remain marginal. So far, only those categories of goods and services that have historically been characterized by the greatest volatility and adapt most quickly to changing economic conditions have reacted. The more “sticky” components of core inflation remain virtually unaffected. The cost shock did not last long enough to trigger classic second-round effects. There was neither a sustained rise in inflation expectations nor a broader pass-through of higher costs to other segments of the economy.

CPI inflation broken into volatility buckets (pts)

Source: NBP, Statistics Poland, Pekao Research

The phase of the business cycle in which we currently find ourselves also contributes to inflation’s weaker response to an external shock. The current macroeconomic situation differs significantly from that of 2022–2023. At that time, the energy crisis and the outbreak of war in Ukraine coincided with a period of strong post-COVID economic recovery, which created favorable conditions for a wage-price spiral to develop. Today, the Polish economy is in a phase of moderate recovery, and the output gap remains close to equilibrium. This means the economy has a much lower capacity to absorb and entrench inflationary pressures.

Output gap (% of potential GDP)

Source: Statistics Poland, Pekao Research

Of course, this does not mean that geopolitical risks have completely disappeared. The situation in the Persian Gulf remains tense, and the scenario of a renewed escalation of the conflict and a further rise in oil prices must still be taken into account. However, we hypothesize that even if elevated fuel prices were to persist longer, current macroeconomic conditions suggest that the impact on inflation would be concentrated primarily in sectors directly dependent on energy and transportation costs. The risk of a broad spillover of cost pressures across the entire economy is currently significantly lower than it was a few years ago.

As a result, we maintain our assessment that CPI inflation in Poland will range between 3.0% and 3.5% yoy in the coming months, remaining below the upper limit of permissible deviations from the NBP’s inflation target.

Financial markets update

PLN assets took a breather last week. The EUR/PLN pair halted its losses at 4.29 and, in our view, has already reached a local peak; after a brief stay near that level, it will head lower. Bond yields already began moving in that direction last week, and this week we expect that trend to continue. Domestic assets are being supported by normalization in the Middle East, an improvement in the inflation outlook, and the fact that interest rate hikes are now a thing of the past. We’ll get confirmation of these trends as early as tomorrow, along with the flash inflation reading for June. We expect it to be 2.7–2.8% y/y, which is low. For the market, this could translate into the first tentative pricing in of interest rate cuts in Poland.