On a display at a gas station, a liter of diesel costs 7.19 zloty. Refueling is also more expensive than ever in Poland, but still a lot cheaper than in neighboring Germany.
Patrick Pleul | Picture Alliance | Getty Images
Poland’s economy got off to a strong start to the year, but as the war in neighboring Ukraine enters its second month, there are fears its growth could be hit from multiple fronts.
Expected export cuts, supply chain disruptions and rising inflation have threatened Eastern European economies in particular since Russia invaded Ukraine on February 24 and imposed a series of international punitive sanctions.
Poland is Europe’s sixth largest economy in terms of nominal GDP (excluding inflation) and is a major producer of machinery, vehicles and electronics, as well as a variety of minerals including coal, copper, zinc and rock salt.
The country’s economic performance in February – which does not capture the full impact of the conflict – was resilient. The country’s industrial production grew 17.6% yoy and a seasonally adjusted 2.1% mom in February, after a monthly increase of 4.2% in January. Production is now 24% above the level at the end of 2019.
Liam Peach, emerging markets economist at Capital Economics, noted last week that there was strength in the country’s export-oriented sectors, with manufacturing and power and gas production also picking up.
However, Peach said the war in Ukraine was casting a “dark cloud” over the country.
“Poland’s economy continued to grow strongly earlier this year, but the war in Ukraine is likely to delay the recovery with a hit to exports, supply chain disruptions and higher inflation,” he said.
“Poland’s exports of goods to Russia amount to around 3% of GDP (these will be more or less lost) and imports from Russia (mainly of raw materials) will be seriously disrupted, which will hit Polish industry.”
Capital Economics has revised down its 2022 GDP growth forecast for Poland to 3.5% from 4.5% – below consensus economists’ expectations – as the war in Ukraine shows no sign of abating.
“Anti-Inflation Shields”
A special cloud on the Polish horizon is inflation. Like much of Europe and beyond, Poland was already struggling with persistently rising prices before the conflict began.
The government temporarily reduced VAT on gas, groceries and petrol in January to curb rising consumer prices, and headline inflation fell to 8.5% in February from 9.4% in January.
However, renewed geopolitical uncertainty and volatility in commodity markets continue to cloud inflation forecasts. In a statement last week, JPMorgan said forecasts must be read with wide error bands, with strong underlying inflationary pressures expected to persist in Poland over the coming months.
Capital Economics’ Peach stressed that higher commodity prices in particular will push up food and energy inflation and depress real incomes and household spending.
“When the government’s tax cuts expire mid-year, energy prices are likely to recover and push inflation towards the 12 percent area,” said JPMorgan’s Emerging Markets Europe team.
“However, we see a very good chance that the government will extend ‘anti-inflation shields’, which would mean a slightly lower CPI.”
However, according to the analysts, there is another upside risk to inflation in the country: the European gas market. Gas prices hit an all-time high in Europe earlier this month.
Poland’s energy regulator approved a 54% hike in gas bills in December, and economists at JPMorgan said more price hikes may be needed.
The country has also taken in droves of refugees from Ukraine. More than 3.6 million people have fled the war so far, more than half of them crossing the border into Poland.
In a statement in early March, Goldman Sachs indicated that the influx of refugees into the CEE-4 (Poland, Hungary, Slovakia and the Czech Republic) would bring a “significant boost to GDP” that would offset short-term losses for businesses and households from the conflict.
Economists cut their 2022 GDP forecasts for the region by 0.25 to 0.5 percentage points and raised them by a similar amount for 2023 as refugees begin to contribute to both domestic demand and the labor force.
The central bank dilemma
With persistent inflationary pressures and new food and energy price shocks threatening to keep consumer prices elevated beyond year-end, the National Bank of Poland now faces a difficult task.
However, this is combined with weak growth prospects, meaning the central bank cannot tighten monetary policy as aggressively as it normally would.
“Under normal circumstances, the NBP could see through the supply shocks and focus on demand pressures, but that space has been eroded over the past 24 months,” said economists at JPMorgan
“There’s no downside to sounding hawkish at this stage: it supports the currency and can be reversed without losing credibility if the situation isn’t so bad later.”
As a result, economists believe the NBP is likely to remain hawkish – favoring higher interest rates to keep inflation in check – although the timing and magnitude of future monetary tightening remains uncertain, depending on FX market risk appetite and demand dynamics.
“The zloty [Poland’s official currency] has recovered from the lows giving the NBP some room to maneuver. If demand-side data weakens from March, it will strengthen the NBP’s ability to argue in the dovish direction,” JPMorgan said.
“Once this is factored in and no massive sell-offs in the zloty are assumed, we believe the NBP will aim for something like a 5% peak policy rate, which we expect to be reached in 2Q22.”
Poland’s central bank raised interest rates by 75 basis points to 3.5% on March 8, the highest level in nine years. This was the sixth increase in the key interest rate in a row.
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