Private consumption to principally drive Polish economy this year and in H1 2017

Negative growth rates in Poland in the initial two quarters of this year were quite unexpected even with a widely expected slowdown in investment. But, a decline in public investment and low EU funds absorption could just be partly blamed for the underperformance, noted Ertse Group in a research report.

Increased uncertainty regarding the legal environment is holding off new business investment. Investment is likely to remain negative in the second half of 2016 and pick up only next year. Fiscal expansion is growth positive; however, the stimulus has not been as strong as was anticipated earlier. Therefore, the Polish economy is expected to expand below 3 percent in the second half of 2016, according to Ertse.

However, private consumption is likely to continue to be the main growth driver in 2016 as well as in the first half of 2017, particularly as labor market conditions have been improving continuously. Nominal wages and employment have sustained strong growth, underpinning increased levels of consumer spending. The impacts of fiscal easing are expected to wane in the first half of 2017, but investment is expected to rebound, growing 3.3 percent in 2017, added Ertse.

Meanwhile, deflation in Poland has started alleviating in recent months and it is quite possible that the inflation rate would come in positive at the end of 2016, ending over two years of deflation. Inflation is likely to accelerate further in 2017 as commodity prices have been increasing lately.

“In 2H17, the inflation rate is expected to reach the lower bound of the target of 1.5 percent and average 0.9 percent in 2017”, noted Ertse.

However, in all, the Polish economy’s inflationary pressure continues to be low as seen by core inflation at its all-time low of -0.4 percent since July. Accelerating inflation and comparatively weak zloty are expected to prevent the central bank’s MPC members from even considering easing the monetary policy in spite of weakening growth.

“Our baseline scenario assumes the policy rate remaining flat at 1.5 percent throughout next year and likely beyond if there is no more pronounced acceleration of GDP”, said Ertse.