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Macroeconomic scenario

Economic growth

Economic activity in Q1 disappointed. Using all available monthly data for that quarter we can estimate Q1 GDP to have amounted to 3.2% yoy, somewhat below our initial assumptions. While the mechanics of the scenario are intact (stable consumption growth, acceleration in exports and investment), the exact numbers will differ from what we had assumed. In particular, the rebound in investment seems to be delayed. Nevertheless, it is still early and the loss in demand can be made up in the next quarters. We are therefore not revising our full year forecasts.      

Inflation

In line with earlier expectations, the beginning of Q2 brought a decline from the “plateau” and a remarkable slide in yearly inflation, which was greatly supported by the high reference base effect from the previous year (on food prices). In turn, at the beginning of the second half of the year, due to next base effects (this time on energy), we will see a downward dip to about 3.0% yoy. At the end of 2025, inflation may even fall below this level. However, “sticky” core inflation (especially in the services sector) will continue to slow down the disinflation process. We will not return to the NBP inflation target (2.5%) permanently until the first half of 2026.

Fiscal policy

Last month we wrote that in view of the ambitious financial plans of the Armed Forces Support Fund, Polish general government (GG) deficit is heading towards 6% of GDP in 2025. We were right - according to the report on the implementation of the so-called budgetary structural plan, the MoF assumes a nominal deficit of 6.3% of GDP in 2025. This means a slight consolidation (by 0.3 p.p. yoy), in line with last year's statements by the MF (0.2 p.p.). The net expenditure path remains in line with the assumptions (19.2% cumulative growth from 2023 against the planned 19.6%): it thus appears that the underperformance of the GG sector in 2024-25 has been due to the disappointing dynamics of last year's tax receipts. The consolidation this year, however, will not be particularly painful: the structural deficit will remain at last year's level of 6.2% of GDP, meaning that the lower deficit-to-GDP ratio will in principle be driven by faster economic growth. The forecast of the total GG debt, on the other hand, will be subject to elevated uncertainty due to the huge disparity in the forecasts of the so-called stock-flow adjustments (0.2% of GDP according to the MoF, 2.9% of GDP according to the EU Commission); nevertheless, total GG debt shall not break 60% of GDP by 2026.

Monetary policy

The NBP president has abandoned his hawkish stance and announced interest rate cuts in May and June by a total of 100 basis points. We see no reason to question his words, especially since he received verbal support from other MPC members. However, we see a risk of more cuts later in the year – although this is not our baseline scenario.

Financial Markets

How much did Liberation Day really change?
A very turbulent month is now behind us, so it's worth taking a step back and assessing how much has really changed since Liberation Day (April 2). It turns out that major US stock indexes and short-term interest rates in the US have returned to the levels before the announcement of the reciprocal tariffs, while long-term interest rates have risen (by about 20 bps) and the dollar has weakened (by about 4%). This implicitly highlights the change in the correlation between US bond yields and the dollar that many commentators have pointed out. It also shows that the tariffs have left a lasting mark on US assets. Indeed, a risk premium has appeared in their valuations and investors, for the first time in a long time, have begun to seriously consider diversifying away from the US and toward other developed markets.
Recent weeks have also ensured that the graveyard of “grand ideas” is full. The Mar-a-Lago Accord, restructuring of world trade, escalate-to-de-escalate, industrial strategy, loss of the dollar's reserve status – all are at best overly sweeping generalizations, if not mere fantasies. In practice, the destination point is almost always a mirage, but the direction of movement itself - not necessarily. The United States will end up with much higher tariffs than in 2024 and the markets will look more cautiously at US assets . However, we get the impression that markets still prefer to look through rose-colored glasses and negative scenarios (e.g. a recession) are not favored by investors. 
The coming months will be decisive not only in terms of the shape of trade and economic policy in the US, but also in terms of its consequences. The markets' sensitivity to the data at the turn of the month (labor market, ISMs) was no accident. We still don't know enough about the impact of the trade war.
 

The market’s big bet against the NBP
The zloty has weakened against the euro since April 2, but strengthened against the dollar. Interest rates, on the other hand, are lower, but here a domestic factor in the form of the NBP’s dovish pivot intervened. This turn is at the same time the linchpin of a rather large disagreement between the market and the bank. Current market valuations assume that NBP rates will fall by 200 bps by the end of the year, close to the rate widely seen as neutral or target. The MPC has not been ready to commit to frontload monetary easing in such a manner, and economists are generally sanguine on the topic as well.  
This is not the first time the market has bet against the NBP. The entire 2021-22 cycle of rate hikes has been marked by underestimation of its scale by forecasters and the Council itself. The market, in turn, consistently (and, as it turned out, rightly) bet on a very aggressive path of rate hikes. However, this method failed with subsequent cuts - the MPC in 2023 showed that it can stop at any time and does not have to chase market valuations. For this reason, we would recommend restraint - the easing (re)starting today need not be conventional.