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Macroeconomic scenario

Economic growth

A series of downside surprises in Polish economic data culminated in a disappointing September package, led by a dreadful September retail sales print. These were bad enough to prompt us to revise our Q3 GDP forecast down again, from 3.0 to 2.7% yoy. Annual average is therefore set to come slightly below 3%, but not low enough to warrant a revision at the moment. How low – it depends on the strength of the rebound in consumption at the end of the year.

Inflation

Currently, core inflation, which is the key issue for the Monetary Policy Council, remains persistently high (especially in the services sector), and its momentum has stabilized at a dangerously high "plateau." We do not see prospects for its decline in the coming months. We will end 2024 with nearly 5% CPI inflation. At the beginning of 2025, we expect another rise in inflation (to almost 6% in the first quarter), partly due to further energy price hikes (we are waiting for government decisions here) and low base effect. We will not return to the NBP target band quickly – in our opinion, this will be possible no earlier than 2026.

Labour market

The domestic labor market is not easing up. Although this slowdown is mainly visible in wage growth, which will soon approach the symbolic value of 10%, it should not permanently fall below this level this year. This will happen only in 2025, although the pace of wage growth will remain elevated (8-9%) partly due to still high inflation. Meanwhile, the unemployment rate and employment remain stagnant, but subtle signs of improvement are emerging on the horizon. Nevertheless, we can expect a full recovery of the domestic labor market only in the new year.

Monetary policy

In the past month, our prediction that the VAT revenue planned for 2024 had been overestimated has been confirmed (we wrote about this in February) – the Ministry of Finance announced an amendment to this year's budget. The increase in the deficit from PLN 184 billion to PLN 240 billion was justified by weaker budget revenue performance (primarily in terms of VAT and CIT), given unchanged spending plans. However, we believe that the Ministry of Finance plans to spend the last two months of 2024 building a financial cushion for next year, advancing part of next year's expenditures. How do we know this? Despite the increase in the cash budget deficit by 1.5% of GDP, the accrual general government deficit grows by only 0.2% of GDP. Additionally, the sovereign bond emission plans for 4Q24 have not increased – the new expenditures of the Ministry of Finance will be covered from the cash reserves.

Financial Markets

US elections – we know almost everything

The global shift to the right did not spare the United States, and the new president is Donald Trump. We do not yet know if Congress will be controlled by Republicans, but the chances for such an outcome are considerable. The volatile market reaction to the US elections is a culmination of several weeks’ worth of directional bets by investors on three major trends: stronger dollar, better environment for companies (hence the behavior of stocks), and higher US interest rates. We have some doubts regarding this last element of the package. It can be linked to the Fed's reaction to the inflationary effects of the new administration's tariff policy and its counter to the easing of fiscal policy. However, the Fed has not responded to tariff increases in the past, and the issue of fiscal policy should be viewed through the lens of its actual impact on inflation. The Fed will continue to do its own thing.

Global monetary easing cycle continues 

We are in the midst of a global monetary easing cycle. Ahead of us are rate cuts by the Fed and the BoE, and these are not this year’s last, as December will bring further cuts from the Fed and the ECB. The arguments are the same everywhere: inflation has basically returned to target (if not, it is very close) and there is no longer a need to keep rates so high. Furthermore, rates at such a level generate their own set of risks that central banks want to counteract. We do not believe that the US presidential election will change this situation as much as the markets think.
As always, it is also worth considering differential bets. The change of guard in the White House will only deepen the differences between Europe and the United States, to the detriment of the former. The ECB not only has no reason to react to changes in US trade and fiscal policies as the Fed would, but may even have more reasons to ease monetary policy.

Polish assets sold off – undeservingly

October was not kind to Polish currency, stocks, and bonds. Amid the sell-off in EM assets, Polish assets lost no less than the median EM. In our opinion, this is an overreaction: there is no idiosyncratic (Poland-specific) factor that makes our exposure to changes in foreign, trade, and economic policies in the USA greater than the European or the EM basket average. There are also solid arguments that Poland may be a relative beneficiary of any potential return of capital to emerging markets, including the bilateral trade balance with the USA, military relations, and the structure and size of foreign debt.