Poland Country Report Jul17 - July , 2017

August 3, 2017

The Polish economy accelerated growth to 4% y/y in the first quarter of 2017, on the back of a 4.1% y/y expansion in domestic demand. However, that included 4.7% y/y growth in private consumption. Investment, which due to the recent recovery in the construction sector was widely predicted to have rebounded from the deep lull into which it fell in 2016, surprised to the downside.

Gross fixed investment dropped a further 0.4% y/y in the first quarter - from an already low base in 2016, despite a 4.6% y/y pick up in the construction sector. Retail benefitted from the rise in consumption. Industry enjoyed a lift from the strong activity in the Eurozone, but domestic demand suffered from continued sluggish investment.

With the growth surge confirmed as the fastest rate since the first quarter of 2015, the outlook for the year remains positive, suggest optimists.

Poland’s consumer sentiment index remains at an elevated level hardly seen in recent years, even though it shed 0.8 points m/m to come in at 4 in July. The growth of the index is in line with the Polish economy’s good start to 2017 and appears a sign that private consumption will remain the main pillar of growth this year. That, in turn, is an effect of falling unemployment and steady wages growth.

The unemployment rate remains Poland's lowest in over 25 years. Joblessness dropped 1.6pp y/y to 7.1% in June. The trend of falling unemployment is an important pillar in Poland's economic recovery.

The consumer price index grew 1.7% y/y in July, and shows that price growth is on a path of deceleration following the surge around the turn of the year. Poland's Monetary Policy Council (MPC) predicts that inflation will remain moderate in the coming quarters and observes no growing imbalances in the economy.

However, challenges to growth remain lower income from taxes and problems in meeting the assumed deficit, which the government claims will not exceed 3% of GDP despite inflated expenditure. Meanwhile, political uncertainty and the poor external conditions in the rest of Europe are expected to weigh on consumer confidence in 2017.

The bank sector profits are under pressure, while pricing conditions in the banking market remain unfavourable as lenders continue to face pressure from the government to unwind huge Swiss franc mortgage loan portfolios.

Domestic politics remain tense with worries attached to the policies of the Law of Justice (PiS) administration. The extreme populist views of the government are unsettling both swaths of the population and the business community which is holding back investment as a result.

On the bright side, several big investments into the transport and energy sectors in particular have been a plus and are expected to create new jobs.

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