Last March retail sales in Poland fell 7.2% YoY when a high reference base contributed to the deepening of the decline. In March 2022, the first wave of refugees from Ukraine arrived, which boosted sales of food, clothing and pharmaceuticals. However, the context is odd. March data shows that the deep decline in fuel sales continued (-20.7% YoY), food sales fell for the third consecutive month (-4.6% YoY), and sales of furniture, consumer electronics and household appliances have been falling on a monthly basis since May (except in January).
The broader economic context is unfavourable. High inflation has translated into a decline in real purchasing power, resulting in a drop in consumption. ING forecasts that household consumption declined by about 3% YoY in 1Q23, following a 1.1% YoY drop in 4Q22. Analysts expect a slight rebound in consumption only in 2H23, provided disinflation continues.
At the same time, industrial production fell by 2.9% YoY. Seasonally-adjusted output dropped by 1.0% MoM. The weak March result was heavily weighed down by a high base in energy generation, which translated into a 21.8% YoY decline in output in this section. Manufacturing production declined for the second consecutive month (-0.4% MoM), which is linked to weakening demand from European manufacturing (Germany included). Mining also recorded weak results (-7.1% YoY).
Among the main divisions of manufacturing the deepest declines were posted in wood (-22.0%), chemicals (21.8%) and metal manufacturing (-19.8%). In contrast, dynamic growth continues in the automotive and related industries. The production of automobiles, trailers and semi-trailers increased by 36.5% YoY, electrical equipment (including batteries for autos) by 20.3%, and other transportation equipment by 16.8% YoY. This is due to the normalisation of supply chains and the fulfilment of outstanding production orders.
Construction output fell 1.5% YoY, compared to an increase of 6.6% YoY in February. The performance is most likely due mainly to residential construction, although infrastructure work did not fare well either. Construction of buildings fell by 10.5% YoY in March. This is a result of the still difficult situation in the housing market, primarily related to the sharp rise in interest rates. The number of housing units under construction has clearly fallen from last year’s peaks but still remains at historically high levels. Developers are most likely finishing projects already underway, not starting new ones. With current demand, the apartments already on offer will cover demand for at least a year. The situation is unlikely to improve anytime soon, as potential buyers may be waiting for details of the government support programme.
Producer price index (PPI) growth slowed to 10.1% YoY in March from 18.2% YoY in February. The main reason for the strong year-on-year decline in PPI inflation is the very high reference base. In March 2022, producer prices rose 6.6% MoM, with prices in the division that includes refined petroleum products rising more than 30% MoM. Compared to February, producer prices declined by 0.8% in March 2023. This was the fifth consecutive month of monthly price declines in manufacturing. Prices in the energy and power generation section also fell markedly (-3.4% MoM).
The slump in orders is particularly evident in the case of exports, the fastest decline since November, primarily linked to the worsening situation in Europe. Companies surveyed indicated that demand was still affected by high prices and general uncertainty. Manufacturers continued to cut jobs. At the same time, purchases fell at the fastest pace in three months, as companies preferred to use up accumulated inventory. The picture emerging from the March data shows a still-tight labour market, although with signs of gradual cooling. The decline in employment, however, is not large enough to ease the pressure on wage increases.
The Central Statistical Office of Poland revised the preliminary March inflation estimate to 16.1% year-on-year. Prices of goods declined to 17.1% YoY (from 20.2% in February), while services prices remained stable at 13.3% YoY. This is due to the upward pressure of other costs (including energy) and wages against downside pressure coming from weak demand.
The decline of yearly CPI inflation in March was mainly linked to energy-related factors. The annual inflation of house energy prices decreased (26.0% YoY vs. 31.1% YoY respectively). At the same time, upward pressure on food prices persists. Food and non-alcoholic beverages were 24.0% more expensive in March than a year ago, and the annual rate of increase remained exactly the same as in February. Vegetables became more expensive by 7% month-on-month. Increases in the prices of clothing and footwear (5.0% MoM) and home furnishings (1.4% MoM) are also noteworthy.
Despite the strong deceleration of the economy and the disinflation trend that has begun, ING does not share market expectations for interest rate cuts before the end of this year. The trajectory of core inflation points to strong persistence in price increases, which will require interest rates to remain at their current high levels for an extended period of time. The decline in core inflation will be relatively slow and will keep CPI at around 9% YoY. Therefore, the first-rate cuts are likely to take place at the end of the third quarter of next year.
Precondition is the decline in the annual dynamics of fuel and energy prices. However, further price declines towards the National Bank of Poland (NBP) target of 2.5% YoY will become increasingly difficult. The process of passing higher costs on to retail prices continues, despite signs of a clear deterioration in consumer demand. And even two-quarters of consumption contraction was not enough to tame core CPI.