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Macroeconomic scenario

Economic growth

There were plenty of two-way surprises in monthly data for the first quarter, but on balance economic activity disappointed relative to our baseline. Using January and February data alone, we estimate that GDP growth remained stable, at 3.2% yoy. Nevertheless the mechanics of our scenario seem intact: investment is rebounding, consumption growth is stable, European demand is improving.   

Inflation

The beginning of 2025 brought lower consumer inflation than previously expected, forming a plateau in the first quarter at a level of almost 5% yoy. On the one hand, the blame can be put on the annual update of the weights in the consumer basket, which lowered all previously forecasted inflation outlooks, including the NBP projection, by 0.4 percentage points. However, we would not be telling the whole truth if we did not draw attention to the faster than previously expected decline in core inflation at that time as well.

The following months will bring a significant, stepped drop in inflation which will be supported by the high reference base effect from last year. Inflation will fall below 4.5% yoy already in April. In turn, at the beginning of the second half of the year, due to further base effects, we will see a downward dip to almost 3.0% yoy. At the end of 2025, inflation may even fall below this level. However, “sticky” core inflation (especially in the services sector) will continue to slow down the disinflation process. In turn, we do not expect a jump in inflation in the fourth quarter caused by a potential unfreezing of energy prices for households. Poland will not return to the NBP inflation target permanently until the first half of 2026.

Fiscal policy

The general government (GG) deficit last year peaked at 6.6% of GDP instead of the planned 5.7%. In our view, this is partly due to lower VAT revenue (-0.2 p.p. of GDP relative to the revised budget provisions); support for flood victims (total losses of less than 0.3 p.p. of GDP) played rather a negligible role. Extra-budgetary defense spending may have prevailed: the threefold updated balance sheet total of the Armed Forces Support Fund (FWSZ) increased by nearly PLN 40bn (1.1% of GDP) over the original assumptions. However, since the modernization of the army will further accelerate this year (+PLN 60bn for the FWSZ Fund), and given that a rebound in consumption is still nowhere to be found, the deficit consolidation to 5.5% of GDP within the Excessive Deficit Procedure (EDP) will not be achieved. 2025 will end with a GG deficit of around 6% of GDP.

Monetary policy

The NBP president has abandoned his hawkish stance and announced interest rate cuts in May and June by a total of 100 basis points. We see no reason to question his words, especially since he received verbal support from other MPC members. However, we see a risk of more cuts later in the year – although this is not our baseline scenario.

Financial Markets

Are markets overreacting with pessimism?

From today’s perspective, the turn of the year looks like the dream of a drunken madman: the markets have lost their enthusiasm for the economic policy of the new U.S. administration, along with the belief in American exceptionalism (in the shape of permanently high interest rates) and the high valuations of the dollar and risk assets. Instead, market narratives now revolve around uncertainty, tariffs and a rotation of assets from the U.S. towards Europe. U.S. Treasuries have not become a safe haven for investors. The rise in 10-year yields contrasts with the relative stability of Bund valuations.

However, it's often the case that investor pessimism peaks at turning points. So what could be the positive scenario for markets?

First and foremost, the wildcard in the American deck has always been the Fed. Low interest rates have always been "tying together" the America First agenda. As was the case in 2019, a looser monetary policy can offset the negative shocks from trade policy and general uncertainty. Markets are currently pricing in five rate cuts by the Fed this year (a total of 125 bps). That’s rational.

Second, the U.S. economy has a long history of surprising its critics. Even if we don’t ascribe supernatural powers to it, it takes time for all the negative shocks to play out.

Third, other developed economies may not live up to the hopes pinned on them. Improved sentiment in Europe might not translate into a real economic recovery for many more months. The German fiscal package is a story for 2026.

Fourth, trade policy doesn’t have to be a one-way street – the negotiation period that began after “Liberation Day”, although so far fruitless, could bring positive surprises.

Finally, rotating assets out of the U.S. into other markets is not an easy task. The share of American assets in portfolios and indices has  been growing for decades. Habits and lack of institutional memory are one thing. Portfolio rebalancing after recent declines is another.

The Revolution of Doves

The higher budget deficit and weaker fiscal position of Poland have gone largely unnoticed by investors. Their attention – and rightly so – has been drawn to the trade wars and the dovish pivot by the NBP. We expected such a shift in communication, but in July. Nevertheless, the arguments for it are convincing: wages are slowing, inflation is undershoots expectations, and energy prices are unlikely to increase. The market – like us – sees no reason not to believe in the announced rate cuts. However, Polish assets are currently losing value amid the global flight from risk, and until the trade war issue stabilizes, we shouldn’t expect a clear strengthening of the zloty (aside from temporary corrections) or lower yields on Polish debt.