In Poland, retail sales rose by 4.2% YoY in August, following an increase of 2.0% YoY in July. The largest increases were reported by ING in necessities (pharmaceuticals, clothing and footwear, food). Durable goods sales continued to limp along, although there were signs of stabilization in car sales as supply-side bottlenecks eased. Demand for durable goods has been soft in recent months, something associated with high uncertainty and weak consumer sentiment. Despite signs of some weakening, however, growth in sales of necessities continues. Demand from refugees from Ukraine remains support. In the coming months, price increases may put pressure on purchasing decisions and induce households to be cautious in their spending, especially in view of the risk of increased housing costs (heating, electricity) in the fall season. The inflationary everything-bubble keeps growing.
Retail sales data fit a scenario of a gradual economic slowdown with weakening consumption. Growth will be slower in 2H22 than in 1H22 when the lifting of epidemic restrictions allowed previously constrained demand in services to be realized and savings accumulated in the pandemic to be spent. Data from the housing sector indicates deteriorating prospects for upcoming quarters, but construction is still expanding. The biggest hit to 3Q22 annual growth is likely to be observed in the lack of support from the inventory adjustments that boosted economic growth in 1Q22 and 2Q22.
The August production reading is a positive signal of economic resilience, given poor leading indicators, weaker orders, and high energy and commodity prices as well as uncertainty about the availability of energy in the autumn-winter period. Industrial production rose by 10.9% year-on-year in August, following an increase of 7.1%YoY in July. Production of motor vehicles, trailers, and semi-trailers increased by 40%YoY and electrical appliances by 23.9%YoY. Analysts estimate that there will be an increase in 3Q22 GDP on a quarter-on-quarter seasonally-adjusted basis and that annualized growth will be close to 3%. ING doesn’t see a technical recession in 3Q22, however, still expects the second half of the year to be markedly worse for the Polish economy than the first with the most risk still in winter.
In August building construction expanded by 25.7% YoY, after rising by 11.7% the month before. Production in this sector has been growing at double-digit rates in each month of 2022 so far. However, there was a strong decline in housing construction starts (down by 46.1% YoY in August). Industries related to infrastructure investment performed poorly: civil engineering (-1.6% YoY) and specialized construction (-1.3% YoY). In residential construction, it is likely that projects already started are being completed. Companies are apparently trying to fill the demand for housing that still exists. At the same time, the slump in new construction shows their concerns about demand in the future in the face of the large increase in interest rates. The weak performance of industries related to infrastructure investment is most likely the result of the strong increase in production costs, which makes it difficult to launch new tenders and the lack of funds from the Recovery Fund.
Producer prices increased by 25.5% YoY in August, i.e. at the same pace as in July, despite another marked decline in fuel production prices (-6.5% month-on-month). Prices in manufacturing increased by 20.2%YoY and in mining and quarrying by 30.4%YoY. However, the greatest pressure was seen from energy prices, which rose in August at a double-digit rate (10.0%MoM) for the second month in a row and are already nearly 80% higher than a year earlier. At the same time, the producers’ prices index (PPI) is around ¼ higher than a year ago, and the process of passing on rising production costs to final prices will continue in the coming months. This confirms the concern that the next few months will bring a new wave of retail price increases. Analysts also expect an adjustment of prices and the economy to face another price surge, this time an energy shock. The expansionary nature of fiscal policy will even increase, making it easier to still pass on high costs to retail prices.
In fact, rate hikes are coming to an end. Recent comments show that the National Bank of Poland (NBP) is rather targeting a decline in the annual CPI and a ‘soft landing’ of the economy, while CPI at 2.5%YoY is a seemingly forgotten target. An important factor that reduces the effectiveness of the rate hikes so far is fiscal expansion. CPI inflation rose to 16.1% year-on-year in August from 15.6% YoY in July. The way to fight inflation on the monetary and budgetary policy fronts in Poland differs from the approach of other countries, where central banks and governments communicate that domestic demand and labor market need to cool down and wage growth to moderate below the rate of inflation. All of this is to avoid a repeat of the 1970s scenario in the US when it took a couple of cycles of rate hikes to bring inflation down to required levels.
The details of August inflation show price pressures in many categories of goods and services. This is the effect of rising wages, high gas and electricity prices (as shown by jumps in categories such as paper, chemicals, and cosmetics), and the weak zloty. The large jump in energy prices was mainly driven by heating fuel (+12%MoM), making it the largest single contribution to the August CPI increase, and municipal heating. The strong holiday season has pushed up the prices of tourist and catering services, compared to last year. ING see very high inflation expectations of firms and households, which are triggering strong second-round effects (firms are passing most of the new costs on to retail prices, and this effect will be seen in the coming months). In turn, a significant increase in the minimum wage acts as a wage-price spiral. And the everything-bubble keeps growing.