In Poland, GDP in the third quarter of 2021 increased by 5.1% y/y, down from 11.2% y/y in the previous quarter. Year-on-year GDP growth is strongly influenced by base effects. If we look at the quarter-on-quarter seasonally adjusted data accelerated to 2.1% from 1.8% in Q2. The Polish economy maintained solid growth, driven by two engines: industry and services, compared to 2020-21 when the industry was the main driver while services were in a recession. ING believes that Poland will see a GDP growth of 5.4% this year, despite the pandemic and a lockdown for now averted by the government. According to analysts, demand and wage pressure will become the key factor driving CPI inflation next year. So far, external supply shocks have played the most important role. Who will throw water on the fire of inflation?

After a strong rebound in the second quarter following the lifting of pandemic restrictions, GDP growth moderated in the third quarter. Sequential growth (quarter-on-quarter) could be affected to some extent in the fourth quarter. The main downside risks come from:

• supply-side bottlenecks in global markets;
• frictions on the labour market due to the shortage of skilled workers;
• increases in global commodity prices, including energy, and maritime transport costs;
• the epidemic of the Delta variant.

The growth outlook for 2022 remains bright, but with risks slightly on the downside. Although all the factors mentioned above will persist until 2022, the economy will still remain strongly supported by public funds and labor market performance. However, Hungary and Poland are struggling to unlock access to advance payments from the EU Recovery Fund due to legal disputes with the European Commission. At the beginning of December, the European Court of Justice will announce a ruling on compliance with the conditionality mechanism with the EU Treaties. For its part, the Hungarian government is pre-financing projects.

The Central Bank has decided to raise interest rates by 75bps, from 0.5 to 1.25%. Economists were generally looking for between 25-50 bps. The increase of 75 bps was neutral for the EUR/PLN rate. While the October rate hike (40 bps) was the consequence of past inflationary results, this month the Central Bank took forward-looking action in the face of the latest projections. These have been significantly revised upwards,  from  2.5%  to 5.8% on average in 2022. In 2023, the average inflation rate is expected to reach 3.7%, which means that inflation will be significantly above the target (2.5%).

The governor announced a rate hike until the current CPI inflation reaches a peak, that is, until the beginning of 2022 (forecasts above 7%). According to analysts, this means that rates are expected to rise by around 25 basis points in December, to the pre-pandemic level of 1.5%. There are also high chances of rate hikes early next year, despite 7 out of 10 MPC members being replaced in January-March. ING believes that rates could reach around 2% in February 2022, but this should not represent the end of the tightening cycle. The governor’s assumption that the squeeze may stop when the CPI peaks seem to be too optimistic. While supply-side factors are driving up the CPI this year, demand and wage pressures will be important inflationary factors in 2022. Unlike other developed economies, Poland is expected to provide a positive fiscal boost next year with the structural deficit expanding (from 4% to 5%). High inflation is also caused by structural factors, such as consumption-driven GDP.

The labor market was tight and minimum wages were expanding even before the pandemic. Therefore, pressures on labor costs are expected to emerge in 2022 with a pro-inflationary impact. For its part, the government is pouring gasoline on the inflationary fire, not only with accommodative fiscal policy (e.g. PIT rate cuts) but also with substantial increases in the minimum wage (+7.5%). There is no doubt that supply-side factors have been a primary factor in accelerating inflation since spring. But, in addition to energy and food, price increases have become generalized and visible in core inflation value. This signals that inflation is spreading and in 2022 the contribution of wages and demand-side pressures will take a leading role in keeping the cost of living at high levels. Not surprisingly, the Polish CPI accelerated to 6.8% year-on-year in October with prices rising 70% in the CPI basket categories.