The preliminary estimate of December inflation was confirmed at 16.6% year-on-year, up from 17.5% in November, although monthly growth was slightly revised down to 0.1% month-on-month. Growth of goods prices eased to 17.6% YoY, while services price inflation rose to 13.4% YoY. Cheaper fuel prices than in November were accompanied by a strong reduction in heating prices (-10.8% YoY). However, food prices continue to rise. In December last year, foodstuffs were on average 22.1% more expensive than a year earlier. The monthly growth of clothing and footwear is also noteworthy as it went against the typical seasonal pattern. Despite the marked decline in the headline inflation rate, appearances are deceiving. Core inflation continues on an upward trend, rising to 11.6% YoY in November. The increase in month-on-month core inflation in December slowed slightly but is still very high by historical standards.
While the jump in petrol prices at the beginning of the year, when VAT on fuel rose from 8% to 23%, was avoided, thanks to the pricing policy of a major player in the fuel market, in January Poles are still facing increases in energy prices for households linked to higher indirect tax rates. More importantly, the beginning of the year is also traditionally the time for companies to update their price lists, so some of the inflationary pressures observed in previous months will be reflected in price rises in early 2023. Signals from the economy show that in some sectors, the barrier of weak demand is insufficient to prevent large price increases. Enterprises still need to adjust prices to higher costs, e.g. wholesale electricity and gas prices grew at triple-digit levels. In ING’s view, the peak CPI will be around 20% YoY.
According to analysts, this year should be marked by disinflation, from around 20% YoY to around 10% in December. But in ING’s opinion, there will be no conditions for interest rate cuts due to the stable high core inflation. Companies continue to face the consequences of the energy crisis, forcing them to pass on higher costs to the prices of their products. At the same time, high wage pressures persist in sectors benefiting from high energy prices. Moreover, indexation processes will limit the rate of inflation decline.
Poland, with its election cycle and the overhang of high energy prices, is exposed to the risk of slow disinflation and the persistence of elevated inflation when the economy rebounds. There will be no conditions for interest rate cuts in Poland this year. However, the decline in headline CPI is expected to dominate global markets.
In this scenario, the goods trade deficit was €1.5bn in October. On a cumulative basis, there was a slight improvement to around -3.8% of GDP. Elsewhere, there was a traditionally high positive services balance of €2.9bn, a fairly deep deficit in the primary income of €1.8bn, and a slightly negative secondary income balance of €0.1bn. Foreign trade turnover continues to grow close to 20% year-on-year (in euros), noticeably slower than in the previous months of 2022 due to more subdued growth in prices. Exports dynamics (20.3% YoY) outpaced imports (17.7% YoY) for the first time since April 2021.
Weaker growth in fuel inflow, a deepening decline in imports of supply goods, and falling consumer imports all helped to curb the high overall import dynamic. This is due to the weakening of domestic demand in Poland.
Polish companies benefit from the weak zloty. They are also catching up on deliveries due to easing tensions in global supply chains, particularly in the automotive industry. Better-than-expected eurozone industrial production and German GDP data suggest decent foreign demand for goods and services from Poland.
Since the beginning of November 2022, €/PLN has remained stable with the trend of a weakening US$ against the euro. For the whole of 2022, ING expects a 3.1% of GDP current account deficit, and a decline to around 2.5% of GDP in 2023. Polish exports tend to be resilient to economic slowdowns, while imports are more sensitive to downturns. Terms of trade are likely to stabilize, although spending on energy imports will remain elevated. In addition, import growth will be supported by high spending on military equipment.
GDP growth in 4Q22 is estimated at 2.0% YoY and for the full year at just below 5%. On the other hand, the GDP outlook for 2023 has improved thanks to the (currently) falling gas prices. This has significantly improved the forecasts for the European and German economies, Poland’s main trading partners. The net effect of these developments is positive, supporting the 1% YoY GDP forecast for 2023.