In July, Polish industrial production grew by 7.6% year-on-year, slightly slower than expectations after a 10.4% YoY increase in June. This broke a string of eight consecutive months of double-digit growth, though it has been decelerating rapidly in recent months. Earlier locomotives of economic growth, such as some heavy industry divisions, are weakening, and the production of consumer durables is slowing down. The relatively strong growth in the production of primary goods – food, beverages, clothing, textiles, also paper or pharmaceuticals – has continued. This is associated with more than 2 million Ukrainians who escaped from their country after the Russian invasion and have remained in Poland. The weakening in demand for durable goods probably reflects very pessimistic consumer sentiment and weaker foreign orders from major trading partners, especially Germany. What next for the labor market?

Weakening external and domestic demand is suggested by a PMI index clearly below 50 points with a marked decline in new export orders. Disruptions over Nord Steam 1 gas supplies to Germany intensified in the middle of the year and could have negative consequences for the Polish industry, which was a solid GDP growth driver in recent quarters. Recent data confirm a rapid deceleration in economic growth from 2Q22. They also support ING’s cautious GDP forecast of 4.7 percent for 2022, which has been below consensus for quite some time.

The jump in prices in the ‘generation and electricity supply category shows that, while the commodity price shock is slowly receding, as seen in the fall in oil prices, the economy will have to adjust to a new energy shock. It is caused by a very large increase in wholesale electricity prices and soaring natural gas prices on European markets. This envisages a stagflationary scenario, with persistently elevated inflation and a slowdown in economic activity. PPI inflation rose to 24.9% YoY in July after 25.6% in June.

Despite the slowdown in economic activity, the health of the domestic labour market remains good. Both employment and wages rose above expectations in July. On a YoY basis, the number of employed in the corporate sector increased by 2.3%, and nominal wages increased by 15.8%. An additional factor that may have raised the pace of placements is the reduction of the personal income tax rate from July. It is possible that some companies have delayed the payment of bonuses and other variable elements of salaries until July when personal taxes were cut. The situation is likely to take a turn for the worse at the end of the year when more symptoms of the slowdown will become apparent. Companies will also hold off on wage increases in 2H22, as they have to accommodate a significant hike in minimum wages starting in January 2023.

Still, the performance of the Polish economy should remain good enough for companies to further pass on high costs to final customers. The increase in labour costs significantly exceeds labour productivity and will be strongly pro-inflationary. This will be particularly evident in core inflation, which is heavily dependent on local demand and labour costs.

In June, the Polish current account deficit turned out smaller than expected once again on the back of an improving trade balance as import growth is easing. On a 12-month basis, the current account deficit was 3.9% of GDP and should start stabilising at around 5% of GDP at the end of 2022. The current account balance recorded a deficit of just €1,468mn in June, made up of a deficit in goods trade (€849mn), negative primary income (€2,460mn) and secondary income balances (€1,039mn) and a surplus in services trade (€2,880mn). On a 12-month basis, the current account deficit was 3.9% of GDP.

Slowing domestic demand and lower prices for some raw materials should curb the increase in the value of imports. At the same time, the unfavourable outlook for European industry may translate into lower demand for Polish exports, although recent industrial production data in the euro area have surprised on the upside. The coming months are likely to see a further widening of the cumulative 12-month current account deficit. This is not a factor that is currently having a significant negative impact on the PLN exchange rate, which is currently mainly shaped by global sentiment and on the monetary policy outlook of the NBP and the Fed and European Central Bank.