Polish GDP expanded 2.5% on the year in the third quarter of the year, the country’s statistics office reported in a flash estimate on November 15.

The reading is significantly below expectations of 2.9% and adds to the questions over the government’s target of 3.5% for the full year. Slower economic growth could translate into lower income from taxes and problems in meeting the assumed deficit, which the government claims will not exceed 3% of GDP despite inflated expenditure.

In adjusted terms in constant prices, the economy expanded 2.1% y/y and 0.2% on a quarterly basis. That is well below the 3% annual expansion and 0.9% q/q growth in the previous quarter.

Analysts speculate the disappointing result owes to weak investment. Like its regional peers, Poland is struggling to get absorption of European Union funds under the new 2014-20 budgetary window up to speed quickly, causing a major drop in public projects after a rush in 2015 to claim the last financing under the previous window. 

Investment is also being negatively affected by sustained uncertainty over domestic fiscal policy and the government’s impact on institutions, Bank Millennium claims. Abroad, growing fears of protectionism also play a role. 

“Without a rebound in investment, one cannot expect GDP to grow above 3% in 2017,” the bank forecasts. Slowing investment has been a factor throughout the year, however, and is not a surprise.

The disappointing lack of effect on consumption from the government's child benefit programme, introduced in April and worth PLN17bn (€3.85bn) this year, is less of a given. “It seems that [the benefit programme] has had much smaller impact on consumption growth than was expected,” Erste notes.

According to the Austrian bank, the poor growth in the third quarter spells trouble for the full year. “We will likely revise the 2016 growth forecast downward from current 3.1% to below 3%, as the slowdown in 3Q16 is much bigger than anticipated. In 4Q16 it is highly likely that growth will remain below 3% as well,” the analysts write.

For now, the Monetary Policy Board (MPC) will retain the status quo, Erste predicts. “However, if the pickup in investment gets delayed and growth remains weaker we would not be surprised to see the MPC softening its rhetoric,” the Austrian bank writes, although any movement on rates is not expected before 2017.