Poland Outlook | Domestic engines are losing steam
Economic growth eased more notably in 2H19, as the slowing German export likely took its toll on the performance of Polish industry. After ten consecutive quarters of GDP growth dynamics holding above a 4% margin, 3Q19 brought a more visible slowdown. Economic activity eased to 3.9% y/y, on the back of cooling investment growth and somewhat weaker private consumption. We maintain our call for GDP growth at 4.2% in 2019 and 3.4% in 2020.
Increased social transfers (extension of 500+ program, 13th pension) did not provide such a strong boost to private consumption as did the introduction of the program in 2016. Although the situation on the labor market remains favorable, employment and wage growth is losing its strong momentum. Therefore, we expect private consumption to slow down from 4.1% in 2019 to 3.6% in 2020.
The long-awaited investment growth peaked in 1H19, but the optimism was short-lived. Next year, we expect investment dynamics to ease to 4.5%, on the back of slowing private and public spending. Recent regulatory changes that burden local governments’ budgets will likely force them to cut investment expenditure in 2020. Dropping demand for investment financing as well as the worsening of business sentiment suggest that the private sector is likely to cap its spending as well.
At this point, we assume stable electricity prices for households next year. Based on that we see headline inflation dropping on average to 2.1% in 2020. However, the final decision on energy prices will only be announced by the government on December 17, 2019. Unfreezing energy prices poses an upside risk to our forecast.