Economic news

• INFLATION: Statistics Poland, confirmed that CPI inflation declined in October to 2.8% yoy from 2.9% yoy in the previous month. Detailed CPI data showed a substantial decline in core inflation (from 3.2 to 2.9% yoy) due to two factors. First, services inflation continues to ease and reached a fresh cyclical low. Second, core goods reversed its earlier spike. Our detailed commentary on the flash release can be found here – there’s not a lot to add after the final release.
• ECONOMIC GROWTH: GDP growth accelerated to 3.7% yoy in Q3, matching estimates. On a seasonally adjusted quarterly basis the economy expanded by 0.8% qoq. In general, the release was hardly revolutionary. It cemented this recovery’s status as Poland’s slowest one this century. On the other hand, Poland will likely remain EU’s fastest-growing economy (Ireland notwithstanding). In two weeks Statistics Poland will publish the second estimate of Q3 GDP along with the details of the release. Our comment on Q3 GDP can be found here.
• MPC OPINION: Two MPC members hit the wires last week: Ireneusz Dąbrowski and Ludwik Kotecki. Both were pleased with recent economic data and the broader picture (low inflation and decent economic growth) and both showed openness to a December rate cut, but refused to precommit. Their opinions on the terminal rate are not entirely in sync, suggesting that the Council has yet to reach a consensus here. Dąbrowski’s target is exactly in line with market consensus and pricing (3.5%), while Kotecki prefers a higher terminal rate (3.75-4.00%).   
• DEBT: The Ministry of Finance informed that it repurchased and sold PLN 12 bn of government bonds. It also released fresh data on retail bond sales. In October the Ministry sold PLN 6.3 bn of retail bonds, slightly down from September’s 6.7 bn.
• RATING: S&P affirmed Poland's "A-" rating and, unlike two other rating agencies (Fitch and Moody's), did not change its outlook to negative. The outlook remains stable.

The Most Underrated Expansion in History

In the comment on the flash GDP figures for the third quarter, we noted that the current expansion phase is now officially the slowest one of this century. Since the local cyclical trough (11 quarters), the Polish economy has grown by a cumulative 8%. For comparison, in previous episodes of this type, cumulative growth after 11 quarters amounted to 10–11%, and in extreme cases even more. Today, we would like to highlight yet another “most.” We are under the impression that the current expansion phase is also the most contested. Never before have we experienced such a pronounced dissonance between the indications of hard economic data and the public perception of economic conditions—particularly with regard to how those conditions are portrayed in traditional and social media. Even allowing for the inherent pessimistic bias of media coverage, looking solely at commentary one might conclude that Poland is currently in recession. How, then, is it possible that Poland is simultaneously the fastest-growing economy in the EU, while public sentiment remains deeply pessimistic?

First, the recurring issue is the distinction between the level of economic activity and its growth rate—a similar dissonance has accompanied discussions about inflation and the “high cost of living.” Economists and commentators tend to focus primarily on growth rates, whereas the public does not always perceive economic phenomena in such terms. For example, most individuals do not calculate the growth rate of their wages. Moreover, a high (or even respectable, as at present) GDP growth rate does not necessarily imply favourable economic conditions if the economy is operating below its potential or its long-term trend.

Poland’s GDP and long-term trend (constant prices, seasonally adjusted, 2019q4 = 100)

Source: Statistics Poland, Macrobond, Pekao Research

Second, low levels of economic activity have consequences in the form of weaker labour demand in particular, changes in labour market flows more generally, and softer business sentiment, accompanied by downward pressure on prices and corporate margins. This mechanism is well understood by economists—it is, of course, the concept of a negative output gap. By all available indicators, the Polish economy is currently operating under such conditions. The divergence between current GDP and its long-term trend is likely the maximum feasible estimate of the output gap and probably overstates it. Nevertheless, even the relatively conservative National Bank of Poland —which tends to revise potential output upward over successive projection rounds—assesses the output gap as negative. This also has implications for the labour market: greater incidence of layoffs, fewer vacancies, weaker wage pressures, and so forth. Although the output gap is not directly observable, it can be approximated using relevant business survey responses. In the chart below, we present the share of firms identifying insufficient demand for their products and services as a barrier to activity. This share is elevated relative to the lows observed in 2018–2019 and 2021–22, indicating the emergence of unused capacity.

Share of firms indicating insufficient demand as a barrier to activity, by sector (%)

Source: Statistics Poland, Pekao Research

Third, the current phase of the Polish business cycle is characterized by substantial sectoral heterogeneity. We refer the reader to one of our recent notes for a more detailed explanation, but the chart above serves as an alternative illustration. It is evident that industry—particularly export-oriented manufacturing—is contributing most heavily to the negative output gap. The proportion of industrial firms struggling with insufficient demand is now at levels last seen in 2015.

Fourth, the dissonance between hard data and public perception also reflects divergent trajectories of nominal and real variables. The latter are vastly more important in the medium and long run, yet economic agents generally do not observe them directly. Accounting is conducted in current prices, whereas real variables—even when monitored—are expressed in physical units (tonnes, cubic metres, units, etc.). Their aggregation does not always yield the same conclusions as the calculation of real indices, since one tonne is not equal to another in value terms.

Fifth, a number of economic and financial indicators monitored by firms are currently at low levels. This applies foremost to corporate margins (see chart below). Moreover, margins have been trending downward in recent quarters, and even if average profitability in the Polish economy is impacted by the extremely weak performance of the mining sector, their level is below historical standards—not to mention the peaks reached in 2021–22.

Profitability Indicators (%)

Source: NBP

Finally, anchoring effects also play a role. The reference point for assessing current conditions and forming expectations is often the period of exceptionally high margins, profits, and growth rates of revenues, sales, wages, etc.—namely 2021–2022. The confluence of factors that produced those outcomes is unlikely to repeat.

In summary, there are sound reasons why the perception of economic conditions may diverge from a straightforward assessment based solely on GDP growth. This is not to say that either perspective is wrong—each simply emphasizes different dimensions of a complex economic reality.

Financial Market Update

We are in for a very calm week in terms of economic readings in Poland, so macroeconomics will not be shaping market sentiment. Fundamentally, we should therefore expect domestic asset valuations to drift horizontally. This scenario is particularly likely for USDPLN, which bottomed out at 3.63 on Thursday and generally has remained within the 3.63-3.64 range. The same cannot be said for the EURPLN pair, which continues to decline, with the euro heading further south this morning, to around 4.22. However, we see no reason for a sharp depreciation of the euro against the zloty. It will therefore be a quiet week, with the only potential for some volatility in the market coming from the POLGBs auction scheduled.