The current account deficit reached almost €3bn in March, following the €2.7bn deficit in February. ING Bank estimates the current account balance on a 12-month cumulative basis deteriorated from -1.7% of GDP in February to -2.2% of GDP in March. The trade deficit jumped from €1.6bn in February to €3.3bn in March. On a 12-month cumulative basis, the trade deficit widened from 1% of GDP in February to 1.7% of GDP in March. The deterioration in external indicators in March reflects the effects associated with the war in Ukraine, including an increase in import bills due to higher energy prices on global markets and a collapse of exports to the East. And the snapshot cannot erase market distortions and inflation from the picture.
The National Bank of Poland’s press releases indicates an important role of price changes as key drivers of exports and imports value, while changes in volumes remained relatively minor. Due to the war, exports to Ukraine collapsed (some increases were recorded only in exports of fuels, food, and medical equipment), while exports to Russia and Belarus dropped because of sanctions. The shares of Russia and Belarus in Poland’s exports declined to the lowest levels from at least 2000. In addition to disruptions in foreign trade with the East, Polish companies still suffer from global supply chain disruptions, resulting from the pandemic. Amid difficult external conditions, analysts expect Poland’s current account deficit to deteriorate further in the coming months to above 3% of GDP levels.
At the same time, StatOffice revised consumer price growth in April to 12.4% year-on-year. Compared with March, annual inflation increased by 1.4 percentage points (from 11%YoY to 12.4%YoY). Unseen in the last two decades, an upswing in food prices (4.4% month-on-month) was responsible for 0.9 percentage points of the mentioned increase. Substantial price growth was reported in the majority of food categories but was particularly strong in the case of meat. On the basis of available data, core inflation excluding food and energy went up to 7.7%YoY in April from 6.9%YoY in March. The coming months are expected to bring a further increase and a local peak at the turn of 2022/23. Double-digit price growth is observed in both goods (13.1%YoY) and services (10.1%YoY).
The inflationary picture emerging from April data suggests advanced second-round effects (passing higher costs of energy and commodities onto retail prices). These seem to be so strong because producers have no problems with passing rising costs of energy and materials and labour onto retail prices in the environment of buoyant wages growth and expansionary fiscal policy (tax cuts, higher spending) which is keeping consumption robust. Inflation is expected to expand further onto categories other than food, energy and fuels in the coming months. The recent growth in labour costs and more expensive energy and materials will continue to drive core inflation northwards. In 4Q22 CPI inflation may increase towards 15%YoY and the odds of double-digit price growth in 2023 are rising.
One important factor behind such a policy stance is the current policy mix, where monetary tightening is accompanied by fiscal expansion. As a result, the tightening provided by the combined monetary and fiscal policy is still moderate. The fiscal policy calls for a more restrictive monetary policy. In June, the MPC may hike rates by 75bps and the main policy rate is likely to reach 7.5% before the end of this year. Analysts see a terminal rate at 8.5% with upside risks if the period of elevated inflation becomes more prolonged.
Industrial output increased by 13.0% year-on-year in April after 17.3%YoY in March. Seasonally-adjusted output moderated by 0.4% month-on-month, in what may be a sign of the first hits from the war in Ukraine and the reported decline in new orders. However, the scale of the impact is moderate so far. Robust growth was reported in heavy industries: mining, manufacture of coke and refined petroleum products, as well as metals and metal products. Producers’ prices (PPI) jumped up by as much as 23.3%YoY last month after a 21.9%YoY increase in March. Prices in electricity, gas steam and air conditioning supply rose by 44.0%YoY, while prices in mining and quarrying were 29.3% higher than in April last year. In the case of manufacturing, the highest price increase was reported in the manufacture of coke and refined petroleum products (90.3%YoY), and metals (37.9%YoY).
Average wage and salary in the enterprise sector rose by 14.1%YoY in April, while average paid employment increased by 2.8%YoY. Wage growth indicates very strong wage pressure and confirms a wage-price spiral. The Polish labour market remains tight and many sectors have reported labour shortages. Mounting labour costs are part of a wider range of intensifying second-round effects. Previous increases in the price of energy, materials, transport and labour generate upward pressure on costs that are passed onto the retail prices of goods and services. In the environment of a consumption boom, additionally boosted by fiscal expansion (tax cuts, 14th pension etc.), higher prices do not trim demand. And sharp increases in prices of necessities (food, fuel, housing) translate into mounting wage demands.
