CEE: Financial risk amid global turbulence | articles

In the last days of October, the market’s attention focused on fiscal policy (2024 budget amendment) and the soft patch in GDP in the third quarter. Despite the volatile domestic environment, the outlook did not change much at the November policy meeting. Softer macro activity data for the 24th quarter may indicate a less hawkish stance, but a more expansionary fiscal outlook and rising headline inflation still necessitate restrictive monetary policy. A majority of the council appears ready to discuss rate cuts in the first half of next year. We anticipate that the first 25 basis point interest rate cut will be in the second quarter of next year, and a total interest rate cut of 100 basis points will occur in 2025.

September data confirmed that 3Q24 was smoother than 2Q24; Annual GDP growth is likely below 3%. We revised our 3Q24 GDP growth forecast from 2.8% annually to 2.5% due to weak consumer spending. Let’s hope the sharp deterioration in consumption in September was due not only to slower real disposable income growth (as headline CPI rebounded following the end of energy price controls) but also to one-off impacts such as the floods in western Poland. Downside risks to economic growth are increasing as consumption growth slows down, fixed investments decrease and the foreign trade balance worsens. But we expect that this is a rather temporary soft period, given that retail sales may recover and also that the PMI is signaling a recovery for the fourth month in a row, paralleling some recovery in the structurally weak German automotive sector of late. In Poland, there are other domestic demand drivers that could start in 2025; for example, the gradual increase in public investment due to the delayed start of the Recovery and Resilience Facility and adaptation funds. Considering that Poland’s private debt is the second lowest in the EU, there is also significant potential for private investment. We estimate that economic growth in 2024 may be close to but below 3%.

Headline inflation continues to rise due to less positive base effects, normalization of energy prices and upward pressure on services prices, keeping core inflation high. High wage increases continue to increase service prices. Inflation reached 5.0% on an annual basis in September and is expected to peak at around 5-6% on an annual basis in early 2025 before slowing in the second half of the year. Our models still suggest that slower wage growth will reduce inflation in the second half of next year and into 2026.

The authorities finally embraced the fact that the 2024 revenues in the budget law were overly optimistic and revised them down by 56 billion PLN in the draft budget amendment bill. The fact that spending plans did not change increased the state budget deficit and, accordingly, the need for borrowing. The aim is to cover most of the new needs in 4Q24 from the liquidity cushion (around PLN 130 billion at the end of October), although 2025 may reduce pre-financing needs. We also think that the government may have shifted some of its 2025 expenditures to the 2024 budget. The general government deficit in 2024 could slightly exceed 6% of GDP, up from the 5.7% of GDP planned a few weeks ago; This could make the 2025 fiscal adjustment effort even larger than originally planned if the 5.5% of GDP target for 2025 remains unchanged.