Polish BGK lowered GDP growth forecast to 0.5% in 2023, inflation peaks in Q1 2023: 20% y/y

Bank Gospodarstwa Krajowego (BGK) has lowered its forecast for Poland's GDP growth in 2023 to 0.5% from 2.8% expected earlier, the bank said. Economists expect problems with growth in all major components of GDP in 2023. This year, economic growth will be 4.6% y/y.

The slowdown is affecting the domestic economy. Consumer demand, although conquered by refugees from Ukraine, is gradually weakening due to high inflation. Its roughly 20% peak will be reached in Q1 next year. Uncertainty related to demand, as well as price processes, is cooling the investment climate. Combined with the downturn in major export markets, these factors create a difficult environment for economic growth in the coming quarters. We expect that the first half of next year may be marked by negative annual GDP growth. For 2023 as a whole, economic growth will slow to 0.5% from 4.6% this year, according to the bank's quarterly macroeconomic report.

The report indicated that consumption will be constrained by declining household incomes in real terms, which will be further compounded by monetary tightening and credit installment increases hitting households with mortgages.

The combination of narrowing margins and rising costs will encourage postponement of investment. The investment climate is also not helped by the proximity of the war in Ukraine. In addition, the activity of the housing industry, which has a significant contribution to domestic investment, will be reduced. As a result, this component of GDP will be marked by deeply negative dynamics in the first half of next year. In the current debt market conditions, the space for fiscal stimulation is also significantly narrowing, which will determine the low level of domestic demand, the bank announced.

It stressed that the second half of 2023 will see a rebound from the weak first half of the year, which will be helped by "contained inflationary processes."

"The balance of risks for the plotted scenario is not symmetrical and stands on the side of weaker economic growth," the statement said. - it reads further.

BGK forecasts that consumer CPI inflation at the end of this year will reach 17.7% y/y, at the end of 2023 - 8.1% y/y, while core inflation at the end of these periods will reach - 12.6% and 5.5%, respectively.

Analyzing the labor market, economists point out that "companies' assessments of labor demand are worsening."

At the same time, households are beginning to feel a greater threat of unemployment. In an environment of narrowing margins, companies will seek savings. This may result in job cuts, the bank further stated.

In the second half of 2023, BGK economists expect a return to single-digit annual wage growth. The unemployment rate will reach 5.4% this year and rise to 5.7% in 2023.

According to BGK economists, the Monetary Policy Council (MPC) will not return to rate hikes after the current pause; this will also be influenced by the low risk of second-round effects, mitigated by the suppression of lending and the nudging of wage growth. BGK estimates that rate reductions are possible next year and assumes a 50-bp rate cut in Q4.

We believe that in terms of inflationary processes, the balance of risks is balanced. Higher supply-side inflation, while it will encourage higher rates, will at the same time aggravate the economy more strongly. More problematic may be FOMC policy. After all, if expectations for the Fed's rate level are raised, the exchange rate channel may force reactions from the MPC, the bank concluded.

Source: BGK and ISBnews