Poland: Strong recovery on the way

Upward revision of 2021 and 2022 growth forecast

We revised up our FY21 GDP growth forecast to 4.2% and FY22 forecast to 5.4%, reflecting recent developments and government announcements. Flash 1Q21 GDP growth arrived at -1.2% y/y (+0.9% q/q s.a.), proving the resilience of the Polish economy to COVID-19 restrictions, which affected the retail and services sectors and have been in place throughout 1Q21. The beginning of 2021 likely marked the last quarter with negative annual growth dynamics. The base effect and recovering economic activity will push 2Q12 GDP growth toward double-digit dynamics.

Pent-up demand and the relatively good situation on the labor market will boost household spending this year. We expect private consumption to be the main growth driver and increase by 4.1% in 2021. On the other hand, the still high degree of uncertainty will weigh on investment growth, which we see at only 1.7% this year. In 2022, funds available within the EU Recovery Plan will boost investments, while household spending will further accelerate, supported by the improving labor market and recently announced government program.

Over the weekend, the Polish government presented a new program, the ‘Polish Deal’, which includes tax reform, increased healthcare spending (to 6% of GDP in 2023) and expansion of child benefits. The government plans to increase the tax-free amount to PLN 30K (from the current PLN 8K) and raise the second PIT rate to PLN 120K (from the current PLN 85K). Moreover, the health contribution will be increased to 9% and will no longer be deductible from the PIT base. Furthermore, changes in civil employment contracts are planned as well. The increase of the tax-free amount is expected to cost the budget PLN 20-22bn annually, while increases in health contributions should bring PLN 14bn, with another PLN 2.5bn coming from changes in employment contracts. The government plans to introduce the announced tax reforms as of January 2022. All in all, the proposed changes will increase the disposable income of households and thus boost private demand, while further limiting the propensity to invest.

May 20 – Labor market statistics for April

We expect wage and employment growth for April to be strongly affected by the low base from last year, when restrictions and ‘Kurzarbeit’ schemes weighed on the labor market statistics. Double-digit wage growth cannot be ruled out, while employment dynamics likely returned to positive territory. Separately, the unemployment rate eased by 0.1pp to 6.3% in April.

Last week’s highlights

• Flash 1Q21 GDP growth arrived at -1.2% y/y (+0.9% q/q s.a.). We revised our FY21 GDP growth forecast up to 4.2% (from 3.4%).

• Flash inflation for April has been confirmed at 4.3% y/y (0.8% m/m).

• Core inflation remained unchanged at 3.9% y/y in April.

• MPC members addressed recent surge in inflation. Rate setter Gatnar called for policy normalization as clear sign that central bank’s focus shifted back to inflation. MPC member Zyzynski suggested 10-15bp hike in order to anchor inflation expectations. MPC member Hardt pointed to decreaseig benefits of loose monetary policy and growing costs of rising inflation.

• We published report on CHF loans in Poland.

Market developments

Bond market drivers – 10Y yield surged toward 2%

Over the course of the week, the long end of the Polish LCY curve went sharply up by 20bp to 1.9%, following regional and core market developments. While the 10Y German Bund went up by 10bp during the week, the long end of the Romanian curved shifted up by 25bp and the Hungarian by 34bp. As a result, the spread over the 10Y Bund widened visibly to 210bp, which is the highest since the outbreak of the pandemic last year. Despite the increased purchases of the National Bank of Poland, the upward pressure on the curve persists. Last week, the NBP bought papers worth almost PLN 8bn and plans to hold another auction on May 26. This week, the MinFin will hold a regular bond auction and offer papers worth PLN 4-7bn. Given the recent strong increase of yields along the whole curve, we revised up our yield forecast and now expect the spread against the German Bund to widen toward 240bp by the end of the year.

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