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Macroeconomic scenario

Economic growth

We saw a solid start to the third quarter with real economy indicators delivering a series of positive surprises, primarily driven by retail sales. The flash GDP reading for Q2 introduced some confusion regarding the growth composition in 2025, but the outlook for the remaining quarters of this year remains positive. The second half of the year should bring GDP growth substantially higher than 4.0%, supported by a solid increase in investment (aided by a low base effect) and consistently strong private consumption. Consequently, our GDP forecast for 2025 remains steady at 4.0%, albeit with downside risks to the outlook.

Inflation

CPI will remain close to the inflation target for an extended period, remaining below 3% yoy at the end of 2025. Moreover, the published assumptions for the draft state budget bill for 2026 do not indicate significant inflationary risk from fiscal policy. This is important for the Monetary Policy Council (MPC) that emphasized the risk of expansionary fiscal policy on the inflation outlook at recent meetings. We assume a continuation of the freeze on household energy prices in the fourth quarter. Average annual CPI in 2025 will be close to 3.5%, similar to 2024.

Fiscal policy

The Ministry of Finance has presented figures for the 2026 budget bill: a budget deficit of PLN 271.7 bn, a general government deficit of 6.5% of GDP, and net borrowing needs of PLN 422.9 bn. All this with GDP growth of 3.5% and inflation of 3%. In nominal terms, this means slight consolidation, as the public finance deficit will decrease relatively to 2025, both in absolute terms and in relation to GDP. So where does this significant increase in borrowing requirements come from? In our opinion, it is a matter of the timing issues with the settlement of investment funds  from the NGEU, which will first be pre-financed by the government (which will involve debt issuance and an increase in borrowing requirements) and only then covered on the European funds account. Total general government debt will remain on an upward trajectory, reaching 66.8% of GDP at the end of next year and exceeding 70% of GDP in 2027.

Monetary policy

Polish monetary policy is between the hammer (falling inflation) and the anvil (loose fiscal policy). This does not rule out further easing, but is a rationale for caution. We expect the Council to cut interest rates by 50 bps this year (including today’s cut) and by 100 bps in 2026.

Financial markets

Bond market gods are angry

For most of the year, we talked about the dollar, but in recent weeks, long-term interest rates have come to the fore. A few facts: 30-year government bond yields in developed countries have risen by an average of 50 basis points this year, and in some cases, by 70-90 basis points. In many cases, we are now seeing new decade highs in long-term interest rates. A glance at the charts shows that the upward trends are continuing. The bond market gods are angry and sending warnings to countries.

There are many reasons for this, but ultimately they all boil down to political economy. The countries at the epicenter of the bond sell-off have a problem with public debt and are unable to stabilize it much less put on a downward path (high interest rates certainly do not help). There are several ways out: fiscal consolidation by a mix of spending cuts and tax increases, bankruptcy, financial repression (keeping interest rates artificially low) and reduction of real debt burden via inflation or reflation. The problem is that all these paths are currently blocked or have already been tested. Bankruptcy is unthinkable, fiscal consolidation is currently stalling, and financial repression and inflationary exit from debt were trialed in 2020-22 and eventually stifled by central banks. There are no easy solutions here.

Paradoxically, perhaps in this context, the Trump administration's attempts to undermine the Fed's independence have an unintended and paradoxical sense. Just as only Nixon could go to China, only Trump can instigate financial repression and make it politically acceptable. 

Polish assets are getting a free pass

The fact that the list of liquid benchmarks for the PLN bond market ends at a 10-year tenor does not mean that the sell-off of long-term bonds has bypassed Poland. It simply needed a catalyst in the form of the sometimes confusing details of next year's budget. Even then, however, it was small – long-term interest rates in PLN have barely changed for two years. The increase in borrowing needs through 2026 is obviously parabolic, but perhaps 2026 will mark a local peak here. The tough problem of the political economy of public debt also applies to the Polish situation, but there are several mitigating circumstances.

First, Poland continues to generate significant economic growth, blunting the increase in debt and servicing costs. Second, foreign investor involvement in the Polish bond market has been low for years, so the potential for closing large crowded positions was small. The Polish economy has several strengths that are independent of fiscal issues, such as real interest rates, economic growth, and external balance. Finally, in the global game, Poland is still a small player – the Polish market is simply small compared to the Gilt, OAT, or US Treasury markets.

Selected macro releases due this month

• Industrial production (our forecast August: 0.2% yoy) In our opinion, the slowdown in industrial production to almost zero is a consequence of a less favorable calendar (the difference in working days falls from 0 to -1 yoy). A risk factor is the timing and extent of retooling shutdowns in the automotive industry. However, they have become less consequential over the years. For this reason, August's output growth should be better than in the same period of 2014 (identical arrangement of working days) for the first time this year.
• Retail sales (our forecast August: 3.2% yoy) We expect retail sales to slow down from 4.8% to 3.2% yoy due to a combination of base effects (sales of clothing and footwear), a decrease in working days on an annual basis (sales of durable goods), and relatively low temperatures (food sales).
• CPI inflation rate (our forecast August: 2.8% yoy) According to the flash estimate, August CPI decreased to 2.8% yoy from 3.1% in July. Month-on-month, prices fell by 0.1%. The inflation slowdown in August was mainly due to lower core inflation - about 3.1% yoy compared to 3.3% in the previous month, which is all the more encouraging after the last two months of upward surprises in this category.
• Wages in the enterprise sector (our forecast August: 8.2% yoy) Recent wage readings have been driven by base effects, and we believe that the easing of these will generate another wage spike in August. We forecast a slight acceleration in wage growth to 8.2% yoy from 7.6% in July. Wage growth will remain volatile until the end of the year, hovering around 8%.
• Unemployment rate (our forecast August: 5.6%) The unemployment rate has been of no use in assessing the labor market condition over the past two months, and we believe it will remain so for the August reading. Regulatory changes introduced in June resulted in a monthly decrease in the number of people deregistered from labor offices by approximately 30k compared to the usual levels. This is most likely a consequence of less frequent verification of unemployed individuals’ readiness to work and the cessation of deregistration for those who refused job offers from the office. We believe the impact of these effects on unemployment rates will subside slowly and gradually, hence we expect the rate to rise to 5.6% in August from 5.4% in July.
• Current account balance (our forecast July: EUR -530 mn) Monthly balance of payments data, especially related to the trade balance, have been surprising in recent months with mixed readings. Nevertheless, it appears that we are emerging from a cyclical trough, and from now on, the Polish trade balance should gradually improve. However, there are many indications that this will be a very slow process. Exports is recovering slowly, while imports is still driven by import-intensive private consumption and higher prices of imported fuels (a significant impact of their June hike). Therefore, we assume that in July we will once again see a deficit in the trade balance, and thus in the entire current account, exceeding EUR 0.5 bn.
• MPC decision (our forecast September: -25 pbs) At its September meeting, the Monetary Policy Council will cut interest rates again, by 25 bps. The unnamed easing cycle will continue.