Economic news:

• BUDGET: Prime minister Donald Tusk announced during his appearance in front of the parliament that Poland will have to spend 5% on national defense, suggesting additional hike in spending. However, previous targets were not reached and over the short term armaments will likely be limited by supply, i.e. the production capacity of domestic and foreign producers and availability in manpower for recruitment.
• DEBT: The Ministry of finance conducted two auctions last week: on Wednesday, it repurchased and sold bonds worth PLN 4.9 bn; on Friday, it sold Treasury bills worth PLN 1.9 bn.

Poland can only benefit from EU rearmament plans

This was a busy week in European fiscal policy. The two major announcements – ReArm programme launched by the European Commission and German fiscal package – have sent European assets to the moon and generated a lot of enthusiasm. The buzz is certainly justified – Europe as a whole is poised to raise defense spending considerably (with full blessing from Brussels), fiscal rules are defanged and Germany is likely to address one of its biggest weaknesses, i.e. excessive fiscal frugality and strangled domestic demand. What does it mean for Poland, though?

Polish exports to Germany (12MMA, bn EUR)

Source: Statistics Poland, Pekao Research

As impressive as Poland’s economic performance since 2019 has been, it occurred almost without significant input from German demand. German economy has been stagnant for years and Poland’s exports to Germany has been weak. Nowhere is the contrast starker than in industrial production – while we often complain about the two-year stagnation in Polish industrial output, it still outperformed Germany industry by 45 pp. (sic!) over the 2018-2024 period. With exports remaining below trend, Poland wasn’t flying on all engines

Manufacturing production (cumulative % change since Dec’17)

Source: Macrobond

It has been our long-standing view that 2025 is set to end the period of slow-to-middling growth. In 2025 the Polish economy will expand by 4% yoy – this is an above-consensus call as the median expectation lies close to 3.5%. Looking at the details of our forecasts and the consensus, we see that it is not merely an investment story, especially now. Another important difference between us and consensus is that we expect net exports to post higher contribution to GDP growth this year. This will not happen, unless external demand picks up, because domestic demand is inherently import-intensive. Our simple rule-of-thumb is that Poland cannot sustainably grow by 4% on domestic demand alone. 

Comparison between Pekao and consensus forecasts of 2025 GDP (%)

Source: Statistics Poland, Rzeczpospolita, Pekao Research

This is where European rearmament in general and the German fiscal package in particular come in. Germany announced a debt-fueled infrastructure and defense package worth even 20% GDP (depending on the increase in defense spending). For European economy watchers (which we do part-time) it seems like a watershed moment – weak domestic demand and overly tight fiscal policy in German has long been identified as a big problem for Germany, the euro area and even for the whole world (think about rebalancing trade and capital flows). It does not address all of the continent’s weaknesses, not even close, but it is exactly what the doctor ordered. 

More importantly, it will spill over to its main trade partners and Poland will certainly benefit from higher external demand. However, this is not primarily a 2025 story. It is more about 2026 and beyond. In our view, European rearmament ensures that Polish GDP will grow at a 4%+ pace beyond 2025. 
 

Financial market update

At the end of the week, markets calmed down - EUR-PLN remained in a very narrow trading range just below 4.18 and POLGB yields fell slightly, tempering the scale of yield increases recorded throughout the week. After all, there was a lot going on last week, but virtually nothing due to the domestic factor - European factors (expected fiscal easing on the continent due to increased rearmament) dominated, resulting in a rise in market rates, steepening curves and basket strengthening of the euro. As for the PLN, it seems like 4.13-4.20 is the new broad trading range. 

This week, we may again be preoccupied with domestic events, as the focus will be on CPI inflation data (basically, for two whole months!) and the MPC's decision, along with the publication of the outlines of a new inflation projection and a press conference by the NBP president. Just a few months ago, it seemed that this would be the moment when interest rate cuts would be back on the agenda. That didn't happen, and the Council's hawkish turn postponed it for several months. Nevertheless, the comments of the NBP president and the shape of the new projection (will inflation already be below target in 2027?) should be important from the point of view of the markets. In addition, this week will be a light one in terms of new bond supply.