The Polish StatOffice revised its estimate of June CPI inflation to 15.5% YoY. Goods prices rose 16.8% YoY and services prices jumped up by 11.5% YoY, compared to 14.9% YoY and 10.8% YoY respectively in May. At the same time, energy prices continue to rise sharply. Energy carriers were 35.1% more expensive in June than a year earlier, with fuels +46.7%. The increase in the price of energy carriers was mainly driven by higher prices of liquid and solid fuels (10.4% month-on-month). The increase in fuel, electricity, and food prices combined accounted for just over 10 percentage points of the June inflation reading. Despite some deceleration, core inflation also continues to rise. ING bank estimates that it rose to about 9.1% YoY in June, up from 8.5% YoY in May. It’s necessary to know your enemy, now more than ever.
Recent weeks have brought declines in gasoline prices, and the summer period is a favorable season for food prices. This does not change the fact that inflation remains Poland’s number one macroeconomic issue. First, it is at a very high level (the highest in 25 years), and bringing it down to the target will require further tightening of monetary policy and curbing domestic demand. Second, the peak of inflation is most likely still ahead. In the autumn, we may witness renewed increases in energy prices (coal, LPG, electricity) and the beginning of 2023 will be marked by high increases in regulated prices (electricity, natural gas).
If the abovementioned risks materialize, analysts call for further interest rate hikes towards 8.50%. Although National Bank of Poland President Adam Glapiński sees inflation peaking in the third quarter of 2022 and has declared that the end of the hike cycle is near, the macroeconomic situation (rising inflation) and the market developments (weakening Polish zloty) will force the central bank to change its stance. ING assumes that the anti-inflation shield will be extended until at least the autumn of next year. This means continuing high inflation in 2024 (low reference base). As a result, the inflation outlook will likely not allow for interest rate cuts next year.
On the other hand, consumption doesn’t show any signs of a slowdown despite very poor consumer confidence and spending plans. This may be explained by an aggressive fiscal stimulus of more than 3% of GDP in 2022. Still, this year’s growth should reach a sound 4.7% YoY. Concerns are more about growth in 2023 which may reach 2.5% YoY.
Retail sales rose 3.2% year-on-year in June, following an 8.2% YoY increase in May. Increases were recorded mainly in sales of necessities (textiles, food, pharmaceuticals), supported, among other things, by purchases of refugees from Ukraine. At the same time, sales of expensive fuel and durable goods deteriorated further. Sales of goods fell 2.8% month-on-month in seasonally-adjusted terms. The deteriorating economic outlook, weak consumer sentiment, high prices, and the expiring support from previously built-up savings are beginning to weigh on consumer spending.
In June, construction output rose 5.9% YoY, falling short of market expectations (around 11% YoY). This was the result of a markedly weaker increase in civil engineering construction than in May and a decline in specialized construction activity. Building construction, on the other hand, looked very good, with an increase of 15.2% YoY, following a 1.7% decline a month earlier. The StatOffice reported a 2.5% YoY decline in investment work and a high increase in repair work (20.1% YoY). Seasonally-adjusted construction fell 3.5% MoM.
The deteriorating economic outlook has translated into a marked easing of the MPC’s course, despite persistently high risks of inflation. This means that the MPC will be cautious and switch to 25bp hikes. The odds of the National Bank of Poland’s rate not reaching 8.50%, or getting there later than we expected, are mounting. The key risks are then linked to CPI and prospects for the zloty.