Economic news

• INTEREST RATES: Statements from several MPC members hit the wires last week. Most importantly, the NBP governor reiterated that inflation was expected to return to target more swiftly than previously believed and this opened the room for rate cuts soon. Other MPC members (Kotecki, Litwiniuk, Masłowska) said they supported restarting the easing cycle in May, although the preferred size of the cut varies between them. They all agree, however, that the room for easing this year amounts to 100 bps or slightly more. This fits our current forecasts, but falls considerably short of market pricing, which recently reached -200 bps by the end of this year.
• CONSUMER: Retail sales fell by 0.3% yoy in real terms in March, somewhat below market consensus of +0.3-0.4% yoy. However, the details of the release seem encouraging to us: the impact of late Easter on food sales was a bit higher than expected and durable goods sales accelerated briskly. Overall, it seems that consumption of goods is recovering. However, consumer spending will be constrained by low real income growth this year. Our comment on the latest retail sales print can be found here. In addition, Statistics Poland published consumer confidence data for April. There was a slight decline in sentiment and the overall level remains consistent with incomplete recovery on the consumer side and moderate consumption growth.
• INDUSTRY: Industrial output was somewhat disappointing in March as it grew by 2.5% yoy compared to expected growth of ca. 3.5% yoy. A more detailed comment on the data can be found here. Overall, we believe that the sector is still in stagnation and that weak external demand is to blame. Until European (in particular, German) industry picks up, Polish industrial output will continue to grow at a very low pace.
• CONSTRUCTION: The biggest disappointment in March data was in construction. The sector’s output declined by 1.1% yoy as compared to expectations of moderate, 5.5% yoy growth. With construction output growing by roughly 1% yoy in Q1, the widely expected start of the new investment cycle appears to be delayed. The detailed data on construction indicates that private investment was stagnant in Q1 and public investment rebounded unevenly. As a result, had it not been for the puzzling increase in residential housing construction (likely a one-off), Q1 would have been even worse. A longer comment on the data can be found below.
• LABOR MARKET: The were no surprises in labor market data for March: wage growth decelerated from 7.9 to 7.7% yoy, employment contracted by 0.9% yoy and unemployment rate went down from 5.4 to 5.3%, in line with seasonal patterns. A more detailed comment on the former two releases can be found here.
• FISCAL POLICY: Statistics Poland confirmed that fiscal deficit (ESA’10 definition) widened from 5.3 in 2023 to 6.6% of GDP last year. As expected, local governments posted a small surplus (+0.4%) and the bulk of the increase came from central government. There were several reasons for the increase in deficit: higher defence and social spending, a hike in public sector wages and weaker revenue growth in some areas. In general this suggests that fiscal policy was more stimulative in 2024 than we previously assumed. This will not repeat this year.  
• DEBT: There were two bond sale auctions last week. The Ministry of Finance sold six bond series worth PLN 12 bn (demand exceeded 14 bn). BGK sold four FPC-series of bonds worth PLN 2 bn.

Curiouser and curiouser: what happened to investment in Q1?

Last week Statistics Poland published detailed data on construction output (for Q1). It breaks down nominal construction spending into specific types of objects and allows us to see what types of investment performed well over that period. It is especially important since construction disappointed in Q1 by having grown by a mere 1% yoy, much below our forecasts. It also suggests that this year investment is ramping up more slowly than we had hoped. There are also new questions to be asked. What have we learned, though?

Construction output by types of objects, % yoy

Source: Statistics Poland, Pekao Research

First, the unexpected highlight of the first quarter is... residential construction. Production in this segment rose by about 25% yoy. This is quite a strong result, given the moment in the cycle that this construction segment is in. After all, we are several quarters after a short-term increase in activity triggered by the introduction of support for mortgage borrowers (the 2% cap on interest rates for some borrowers), the easing of lending conditions and the reduction of interest rates in late 2023. In Q1 2025, the number of both housing starts and completions were already falling, suggesting that the peak in activity was behind us. There may have been some reshuffling in bookkeeping at the turn of the year (4Q2024 brought a drop in housing construction), but we don't have sufficiently detailed knowledge of this. In any case, there is no indication that the housing segment will rebound anytime soon. We need to wait for rate cuts and their real effects.

Residential construction in Poland (% yoy)

Source: Statistics Poland, Pekao Research

Second, private investment other than housing continues to perform poorly. In the first months of the year, construction output fell in the following types of commercial construction: office, retail and industrial.  Here we are not surprised - 2025 was not supposed to be the year of private investment (too many negative factors).

Thirdly, public investment in the first months of the year in light of the above data comes out slightly on the positive side. In most segments we traditionally associate with the public sector, outlays did not change, this is especially true for roads (+1.5% y/y), pipelines and other transmission lines (+1.7% y/y). Railroad investment increased significantly (by about a half), but on the other hand, sports and cultural investment, where local governments play a large role, fell. In general, if not for the increase in residential investment, the entire construction industry would have been in the red.

The above figures do not include an important part of investments, i.e. machinery and equipment (including means of transportation and armaments). On these, however, we get almost no knowledge from monthly or quarterly data. Nevertheless, construction and assembly production remains a good predictor for total investment and is virtually insensitive to revisions. That's why the Q1 2025 data may be worrisome. In the coming quarters, we will see a decline in residential investment, stabilization in other private investment and acceleration in the public segment. The net result  of these three trends, however, is uncertain, and we will keep our eye on the upcoming data.

Financial market update

Recent data from the Polish economy surprised on the lower side. We already know that growth in Q1 2025 was not impressive, and we should not be concerned about demand pressures in our country. In theory, this gives more room for rate cuts by the MPC, but this is all already priced in. To be specific, markets are pricing in 200bp of rate cuts this year and a good chance of 50bp at the next meeting. Given A. Glapinski's rather clear forward guidance and comments from other Council members, such expectations are understandable (although we ourselves expect a smaller scale of cuts this year: 100bp). The space for a further reduction in the valued path of rates is already very small in our opinion. We are left waiting for the MPC's May meeting and its outcome both in terms of the decision (we assume a 50bp cut) and the message (“it's not a cycle, just an adjustment”). Until then, we expect little movement on the zloty and POLGBs yields. If there are any, it is more likely to be in the direction of a stronger zloty, supported by improving global risk appetite.