Jan Cienski in Warsaw -

Poland's economy is showing increasing signs of slowing, with new data released on July 23 indicating sluggish retail sales growth. The poor numbers come on on top of recent PMI and industrial production numbers, and add to evidence that the economy decelerated in the second quarter.

Retail sales grew by an annual 1.2% in June, compared to 3.8% in May. The figure is far below economists' expectations of 4.1%. The biggest drag on sales came from motor vehicles due to changes in VAT rules.

Krzysztof Kolany, chief economist for bankier.pl, writes: "June's very weak retail sales result is yet another report confirming the thesis about a definite slowdown in the Polish economy. In the period from April to July, it is almost certain that we have experienced a fall in annual GDP growth for the first time in five quarters. The fundamental question today is: is this temporary or is the peak of the economic recovery already behind us?"

The falling retail sales came despite a steep drop in unemployment, which fell to 12% in June compared to 12.5% in May. It was the steepest fall in the jobless total since 2008, and a positive surprise for analysts. Unemployment for the same period a year ago was 13.2%. However, Polish shoppers are obviously more concerned about the future outlook for the economy than the more immediate employment picture.

That perception problem will probably continue to haunt retail sales for the rest of the year, acting as a drag on economic growth, notes Malgorzata Starczewska-Krzysztoszek, chief economist for the Polish employers confederation, Lewiatan.

More pressure for a cut

The market is betting that the slowing economy, coupled with dropping inflation and signs that the economy could even fall into deflation by the third quarter, is going to make the central bank take a close look at whether to cut rates from their current record low 2.5% later this year. However, central bankers and analysts are not so convinced.

Daniel Hewitt of Barclays writes: "Future monetary policy depends on what happens in [quarter three] and, to some extent, just how bad the [second quarter] GDP performance turns out to be. While growth clearly stalled in Q2, we forecast it will recover in Q3 because of favorable domestic consumption indicators and our expectation that euro area growth will accelerate. If this does not prove to be the case and the NBP becomes concerned that the Polish growth recovery is not sustainable, the bank will likely cut rates. While monetary policy has become come data dependent, we retain our base scenario of no cut."

Rate-setter Andrzej Kazmierczak offered the same message on July 23, according to Reuters. Speaking to reporters in parliament, he insisted there's no need to change interest rates for now, because the central bank first needs to see if economic weakness from the second quarter will persist. "The Monetary Policy Council cannot react to transient phenomena, the MPC bases its actions on a long-term outlook," he said.