Poland Country Report May17 - May, 2017

June 10, 2017

Poland’s GDP grew 2.8% in 2016, the slowest expansion in three years, on the back of weakest investment since 2010. The result was below the government’s outlook of 3-3.2%, which was anyway a reduction on earlier predictions of an economic expansion of 3.8%.
 
What economic expansion there was in 2016 was driven almost solely by household consumption, powered by rising wages and falling unemployment. A sharp fall in investment, and erratic performance in industry and export demand proved a drag. Like its regional peers, Poland struggled 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.
 
The government insists the economy will return to form in 2017. The Polish economy accelerated growth to 4% y/y in the first quarter, 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.
 
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.
 
Deflation that has dogged Poland has come to an end. Poland's consumer price index grew 1.9% y/y in May. It was the sixth month prices expanded in over two years. Core inflation has fallen every month in 2016, but should go positive in 2017.
 
The bank sector profits are under pressure and the banks will need a capital injection if economic growth slows. The problem is lingering uncertainty over government policy - especially over a mooted rebate forced on banks to deal with CHF loans.
 
Domestic politics remain tense with the government passing, or looking to pass, new illiberal laws to limit protests after a series of extremely large protests forced the government to backtrack on an abortion law among other initiatives. 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, the unemployment rate remains Poland's lowest in over 20 years. Joblessness dropped 1.7pp y/y to 7.7% in April. The trend of falling unemployment is an important pillar in Poland's economic recovery.
 
Also several big investments into the automotive and transport sectors in particular have been a plus and are expected to create new jobs.

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