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Poland’s economy standing strong but Ukraine war sparks GDP fears


A display in a gas station shows that a liter diesel is 7.19 Zloty. Although fueling up is more costly than it used to be in Poland, it’s still much cheaper than the neighboring Germany.

Patrick Pleul | Picture Alliance | Getty Images

While Poland’s economic performance has been strong in the first month of the year, fears are growing that it could suffer from the effects of the war in Ukraine.

Since Russia invaded Ukraine on Feb. 24This triggered an avalanche of international punitive sanctions. The anticipated impact on exports, disruptions in supply chains, and rising inflation are all threats to Eastern European economies.

Poland, Europe’s 6th-largest country by nominal GDP, is a significant producer of machines, cars and electronics. It also produces a variety of minerals, including copper, zinc, and rock salt.

The country’s economic performance in February — which does not capture the full impact of the conflict — was robust. After a monthly increase of 4.2% in January, industrial output in the country increased by 17.6% in February. It also grew seasonally adjusted 2.1% month-on–month. The production level is 24% higher than the one at the beginning of 2019.

Liam Peach, emerging markets economist at Capital Economics, noted last week that strength has been seen across the country’s export-oriented sectors, with manufacturing and electricity and gas production also on the up.

Peach however stated that Ukraine’s war was “a dark cloud” hovering over the country.

“Poland’s economy continued to expand strongly at the start of this year but the war in Ukraine is likely to drag on the recovery through a hit to exports, supply-chain disruptions and higher inflation,” he said.

Polish exports of goods to Russia total around 3% (these will more-or-less be lost), and Russia’s imports, mainly raw materials, will severely affect Polish industry.

Capital Economics has revised down its 2022 GDP growth forecast for Poland from 4.5% to 3.5% — below consensus expectations among economists — as the war in Ukraine shows no sign of abating.

‘Anti-inflation shields’

Inflation is one of the biggest problems facing Poland. As with many European and other countries around the world, Poland had been struggling with rising prices long before the conflict.

In an attempt to control surging consumer prices and to reduce inflation, the government temporarily reduced value added tax on gasoline, food, and gas in January. The headline inflation fell to 8.5% from 9.4% in January.

Inflation forecasts are further complicated by the new geopolitical uncertainty, and volatility in commodity market markets. JPMorgan stated last week that forecasts should be read within wide error margins. There are strong inflation pressures in Poland expected to continue over the coming months.

Capital Economics’ Peach stated that higher commodity prices, in particular, will drive up energy and food inflation. This will result in lower real incomes for households and a decline of household spending.

JPMorgan’s Emerging Europe team stated, “When the government’s tax reductions expire midyear, energy prices tend to rebound, pushing inflation toward the 12% zone.”

We believe there is a good chance that the government will continue the “anti-inflation shields,” which would result in a lower CPI.

According to analysts, however, the European gas markets pose a risk for inflation. The European gas market saw prices rise to an all-time high earlier in the month.

In December, Poland’s energy regulator approved a 54% rise in gas bills. JPMorgan’s economists indicated that additional price hikes might be required.

It has received large numbers of Ukrainian refugees. There are more than 3.6 million people have so far fled the warMore than 50% of them have already crossed into Poland.

Goldman Sachs wrote at the start of March that an influx of refugees to the CEE-4 (Poland Hungary Slovakia Slovakia Czech Republic and Slovakia) would provide a “material increase to GDP” which will offset short-term impacts on businesses and households caused by the conflict.

In 2022, the economists decreased their forecasts of the region’s GDP by 0.25 to 0.5 percentage points. However, they raised them for 2023 by the same amount as 2023 when refugees start to increase both the domestic and labor market.

The dilemma of the central bank

Due to the persistent inflation pressures and the new shocks in food and energy prices, the National Bank of Poland faces an extremely difficult task. These price increases will continue beyond year end and threaten consumer prices.

However, this combined with the fragile outlook for growth means that central banks can’t tighten their policy as aggressively.

JPMorgan economists stated that the NBP can look at supply shocks in normal conditions and concentrate on demand-pull tensions. However, this leeway was eroded over the past 24 months.
“At the moment, there’s no downside to being hawkish. This supports the currency. If the situation becomes worse, you can reverse it without losing credibility.

As a result, the economists believe the NBP will likely remain hawkish — favoring higher interest rates to keep inflation in check — though the timing and scale of future policy tightening moves remains uncertain, dependent on risk appetite in the foreign exchange market and demand dynamics.

“The zloty [Poland’s official currency]NBP is able to move freely now that the market has recovered from its lows. JPMorgan indicated that the NBP will be able to make dovish arguments if the demand side data falls from March.

We believe that the NBP will target a policy rate close to 5% once this is included, and we assume no major sell-offs of the Zloty. This we anticipate will happen in 2Q22.

Polish central banks raised their benchmark interest rates by 75 basis points, to 3.5% on March 8. This was the highest rate in 9 years. This marked the sixth consecutive rise in main policy rates.