Poland’s economy remains strong, but Ukraine war raises GDP fears

At a gas station display, a liter of diesel costs 7.19 zloty. Refueling is also more expensive than ever in Poland, but it is still much cheaper than in neighboring Germany.

Patrick Pleul | Images Alliance | fake images

Poland’s economy is off to a good start to the year, but as the war in neighboring Ukraine enters its second month, there are fears its growth could be hit on multiple fronts.

Given that Russia invaded Ukraine on February 24 and triggered a series of punitive international sanctions, the anticipated impact on exports, supply chain disruptions and rising inflation have particularly threatened Eastern European economies.

Poland is Europe’s sixth largest economy by nominal GDP (not adjusted for inflation) and a major producer of machinery, vehicles, and electronics, as well as a large number 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 strong. The country’s industrial production grew by 17.6% year-on-year in February and 2.1% seasonally adjusted month-on-month, after a monthly rise of 4.2% in January. Production is now 24% above the level seen at the end of 2019.

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

However, Peach said the war in Ukraine was casting a “dark cloud” over the country.

“Poland’s economy continued to expand strongly earlier this year, but the war in Ukraine is likely to drag down the recovery through a hit to exports, supply chain disruptions and higher inflation,” it said.

“Exports of goods from Poland to Russia amount to about 3% of GDP (more or less will be lost) and imports from Russia (mainly raw materials) will be seriously affected, which will affect Polish industry.”

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

‘anti-inflationary shields’

However, there is another upside risk to inflation in the country, according to analysts: the European gas market. Gasoline prices reached an all-time high in Europe earlier this month.

Poland’s energy regulator approved a 54% increase in gas bills in December, and economists at JPMorgan said more price hikes may be needed.

The country has also welcomed refugee groups from Ukraine. More than 3.6 million people have so far fled the warand more than half of them have crossed the border with Poland.

In a note in early March, Goldman Sachs suggested that the influx of refugees into the CEE-4 (Poland, Hungary, Slovakia and the Czech Republic) will provide a “material boost to GDP” that will offset short-term shocks. companies and households in the conflict.

Economists lowered their GDP forecasts for the region by 0.25-0.5 percentage points in 2022, while raising them by a similar amount for 2023 as refugees begin to contribute to both domestic demand and the workforce. labor.

The central bank dilemma

The National Bank of Poland now faces a difficult task, given relentless inflationary pressures and new food and energy price shocks, which threaten to keep consumer prices high beyond the end of the year.

However, this is combined with a fragile growth outlook, meaning the central bank cannot tighten policy as aggressively as it normally would.

“Under normal circumstances, the NBP might look at supply shocks and focus on demand pressures, but that room for maneuver has eroded over the past 24 months,” the JPMorgan economists said.
“At this stage, there is no harm in sounding aggressive – it supports the currency and can be reversed without losing credibility if, later on, things are not so bad.”

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

“The zloty [Poland’s official currency] it has rebounded from the lows, providing the NBP with some room to manoeuvre. If demand-side data weakens from March, that will strengthen the NBP’s ability to argue in the dovish direction,” JPMorgan said.

“Once that is factored in, and assuming no zloty sell-off, we think the NBP will target something like a 5% top benchmark rate, which we expect to be reached in 2Q22.”

The Polish central bank raised its benchmark interest rate by 75 basis points to 3.5% on March 8, its highest level in nine years. This was the sixth consecutive increase in the main policy rate.

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