The economy is weakening but avoiding a recession.  What saved us?

Let’s first take a look at the hard data announced by the Central Statistical Bureau for the third quarter of this year. Seasonally unadjusted Polish GDP increased by 3.5% in real terms. every year. This is a very clear weakness, because the previous quarter the economy was growing at an annual rate of 5.8 percent.

If we look at the quarterly data (given by the IRS in seasonally adjusted terms, referring to constant prices from 2015), GDP in the third quarter grew by 0.9 percent. compared to before. And we well remember the dramatic collapse of the previous quarter, when GDP contracted by as much as 2.3%. (That’s what the latest numbers say) compared to the previous one. It smelled like going into a slump. And he’s fast.

– The most interesting conclusion concerns the dynamics quarter after quarter, not year after year. An increase of 0.9 percent. In the first approach, this means that, according to the current state of knowledge, Poland has avoided a technical recession, Pekao Bank analysts wrote.

The recession, deep and imminent, was quickly announced by the economic indicators. And those calculated by the Central Statistical Office, the state-owned Polish Economic Institute and, above all, the Purchasing Managers’ Index. The economic situation in the fields of manufacturing, construction and trade has been deteriorating almost continuously since the second half of last year. The PMI in February was at 54.7 and after several months of steady decline it was at 40.9 in August.

Meanwhile, the strong data on industrial production and retail sales for the subsequent months of the third quarter, although they showed a gradual weakening of the economy, were not so strong as to predict a recession. Only construction and assembly production has declined significantly due to developers closing investments due to lack of demand for expensive apartments and loan costs, as well as shrinking public investment due to lack of EU funds.

It cannot be ruled out that the construction industry will show the direction the economy will follow in the coming quarters. However, the “optimistic” scenario, that is, a relatively shallow and short-term recession, cannot be ruled out either. So – as economists used to say – a “soft landing”.

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Economists draw attention to two important facts that happened in the third quarter and saved the economy from recession. The first is related to industry. There has been a marked improvement in global supply chains, which has put the auto industry back on its feet. Monthly data on production showed how dynamically this industry has developed in Poland. At the same time, the extraction of hard coal and lignite has been growing for several months at a rate of more than 20%. every year. The recovery of the auto industry and the increase in yields are likely to result in a sequential quarterly decline in GDP.

Bankers are interested in the second fact that defended the economy against recession. With a general decline in investment in one industry, a real boom began in Ukraine with the outbreak of war. This is a photovoltaic farm building. Unable to count on supplies from state-owned companies that dictate exorbitant prices, the companies themselves decided to invest in energy production.

– We note an increase in the activity of investments in alternative energy sources and energy saving, – said Pronon Bartkevich, President of ING BŚK, at a press conference dedicated to presenting the bank’s results for the third quarter.

The Central Bureau of Statistics published a preliminary estimate of GDP without detailed data. We won’t know them until November 30th. After this remaining data, which is released month after month, we can see continued consumer demand, albeit weak. Let’s add that it is provided with refugee money from Ukraine, which is spent on the most urgent needs – food, medicine, cleaning products, clothes and shoes. Annual increments are maintained in these sections. Durable goods sales continued to decline sharply.

– (…) The main source of the slowdown in the dynamics of GDP in the third quarter compared to the second quarter was a decrease in the contribution of consumption, which was caused by a decrease in the real growth rate of the wage fund, and also a strong deterioration in the consumer economy, analysts from Credit Agricole Polska wrote.

Of course, the “basic effect” is of great importance for consumption data, because refugee money a year ago did not supply the Polish economy. This effect is likely the reason for the statistical increase in sales despite rampant inflation. The Central Bureau of Statistics confirmed its earlier estimate that consumer prices rose 17.9 percent in October. However, this effect will end in the second quarter of next year and it will start to have a negative impact.

– (…]High inflation erodes the purchasing power of households, since the increase in wages does not keep pace with the increase in prices. This is accompanied by unfavorable consumer sentiment, which translates into a decrease in spending on durable goods – commented the chief economist of ING BŚK Rafał Benecki on GDP data.

We can only speculate about the other elements of the GDP structure. We don’t know what the net export contribution was, although we do know that the current account deficit narrowed unexpectedly in September. On the other hand, business climate surveys show a steady decline in foreign demand.

– The obvious candidate for the source of surprise in light of the unexpectedly good data on the balance of payments for September (…) is net exports – Pekao Bank analysts wrote.

For several quarters, Polish GDP has been “occupied” by increasing inventories, which companies have accumulated in fear of disruptions in supply chains and price increases. Economists ask themselves if and when inventories will begin to decline, which would contribute negatively to GDP. Based on data from banks on the ever-increasing volume of working capital loans, it can be assumed that companies continue to build up inventories, thereby escaping from rising inflation. This may have a positive impact on GDP in the third quarter.

The GDP data for the third quarter was surprisingly good, but it doesn’t change the outlook for 2023. The pace of the economy’s descent into recession has slowed unexpectedly, but the azimuth remains the same. The only question is for how long, how deep and how socially painful it will be. Because, in addition, it will come in conditions of absolute inflation.

Jacek Ramotowski

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