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Macroeconomic scenario

Economic growth

Polish GDP accelerated to 3.2% yoy in Q4, led by a rebound in consumption and a relatively good (for a phase of the EU investment cycle) investment performance. We wrote more about last year's GDP in previous publications (1, 2, 3). In 2025, we expect GDP to accelerate to 4% due to improved foreign demand (the consensus outlook for economic growth in Western Europe is too pessimistic in our view) and a significant increase in public investment. Monthly data (construction, industry, retail trade) provide the first signs of such a scenario.

Inflation

January brought an even stronger than previously expected acceleration of inflation and that's not the end of it - we will have to wait until March for its peak in this cycle (above 5.5% yoy). In turn, at the beginning of the second half of the year, due to base effects, we will see a downward dip below 4.0% yoy. We do not expect a jump in inflation in 4Q25 caused by the unfreezing of energy prices for households. However, the "sticky" and long-term elevated core inflation (especially in the services sector) is already a nuisance and will remain so for a long time. We will not return permanently to the NBP inflation target (understood as the range of permissible deviations from 2.5% yoy) any time soon - in our opinion, this will not be possible before the first half of 2026.

Labour market

On the domestic labour market, no major changes - wage growth is slowing at a snail's pace, the unemployment rate is following a seasonal pattern, and employment remains in a stable negative territory (the decline in growth from -0.6% to -0.9% yoy in January cannot be taken quite “seriously” due to the CSO's annual change in its sample of surveyed companies). It's hard to expect sudden turnarounds here. As long as domestic industry does not kick into a higher gear, a “positive” employment print and a drop in the unemployment rate clearly below 5% will be unattainable. However, we believe that with the recovery in investment, the Polish labor market will revive somewhat around mid-year.

Monetary policy

Recent statements from the MPC indicate that the stable majority on the Council shares the hawkish turn in monetary policy stance demonstrated by A. Glapiński in December. This means that at least until March, and most likely until July 2025, monetary policy will keep its course. One will be able to constructively discuss timing of further rate cuts again only after publication of the next NBP inflation projection in March. We maintain our forecast that we will see four rate cuts (100 bps altogether) in the second half of the year.

Financial Markets

Tariff headaches

In a previous comment, we mentioned two interpretations of US tariff policy. One was that tariffs are a tactical instrument (for negotiations and concessions), while another was that they are strategic (to reshape US relations with the world). After February and early March, the pendulum shifted decisively toward the latter option. Since yesterday, but with exemptions, 25% tariffs on imports from Canada and Mexico have been in effect (their suspension for a month was previously received positively), while ahead are steel and aluminum tariffs (March 12) and “reciprocal tariffs” (April 2). The latter is likely to include, among other things, an increase in tariffs on goods from the EU. So tariffs will go up fast, hard and broadly. This is not the only trouble for the economy. The way they are introduced is problematic in itself, because it is done in a chaotic, unpredictable and arbitrary manner.

The world's largest economies are quite closed at the same time, so the direct effect of tariffs (which depends on the exact exchange rate reaction mix of declining consumption and exports in the country imposing the tariffs) will always be some fraction of a percent. Nevertheless, these are not the only effects - uncertainty comes at a price and the diversion of trade flows can result in suboptimal allocation (extreme example: Americans are too productive to sew clothes for themselves) and lower aggregate output.

Some dark clouds have appeared over the U.S. economy, and the markets have rediscovered the idea of rate cuts. So our idea of a repeat of 2018/19 (tariffs --> demand destruction --> forced rate cuts) makes more and more sense. At the time of writing this commentary, the markets were pricing in three Fed rate cuts this year, while just recently there was only one expected. This brings us back in broad strokes to another idea - that without lower rates, the “America First” agenda has no chance of success. The path to lower rates, however, is through a weaker economy, and that opens the markets to a whole new bet. Where is Europe in all this? Paradoxically, in a pretty good place, given the space for monetary stimulation and the armament-fiscal plans.

PLN appreciation no longer a one-way street

The zloty has outperformed the EM basket by about 7% over the past year and remains one of the strongest currencies in this universe. Nevertheless, the space for further nominal appreciation is already limited. Responsible for the last few pennies of appreciation, peace in Ukraine is much less certain than it seemed and the market has rediscovered the NBP rate cut, setting the maximum level of rate disparity between Poland and abroad. However we do not see space for significant weakening of the zloty at the moment, we are probably close to the tops. The FI market, on the other hand, is influenced by global currents, and these currents favor higher rates (currently, in the FI world, European factors are more important than American ones).