Poland’s GDP grew 2.8% in 2016, the slowest expansion in three years, missing the government’s assumption for a 3.5% expansion.
What economic expansion there was in 2016 was driven almost solely by household consumption, powered by rising wages and falling unemployment. A sharp fall in investment, and erratic performance in industry and export demand proved a drag. Like its regional peers, Poland struggled to get absorption of European Union funds under the new 2014-20 budgetary window up to speed quickly, causing a major drop in public projects after a rush in 2015 to claim the last financing under the previous window.
The government insists the economy will return to form in 2017. A more positive outlook on GDP growth for early 2017 was strengthened by strong retail sales growth of 5.2% and industrial production expansion of 1.2% y/y in February. After several months of falls, a growth of 2.1% was also recorded in the construction sector, which suggests the investment lull is on the cusp of a revival thanks to improving uptake of EU funded public projects. However, challenges to growth remain lower income from taxes and problems in meeting the assumed deficit, which the government claims will not exceed 3% of GDP despite inflated expenditure.
Growth has been buoyed by strong consumption for most of 2016 but political uncertainty, a slowing economy and the poor external conditions in the rest of Europe are expected to weigh on consumer confidence in 2017 and reduce consumption as an economic driver.
Deflation that has dogged Poland has come to an end. Poland's consumer price index grew 2% y/y in March. It was the fourth month prices expanded in over two years. Core inflation has fallen every month in 2016, but should go positive in 2017.
The bank sector profits are under pressure and the banks will need a capital injection if economic growth slows. The problem is lingering uncertainty over government policy - especially over a mooted rebate forced on banks to deal with CHF loans.
Domestic politics remain tense with the government passing, or looking to pass, new illiberal laws to limit protests after a series of extremely large protests forced the government to backtrack on an abortion law among other initiatives. The extreme populist views of the government are unsettling both swaths of the population and the business community which is holding back investment as a result.
On the bright side, the unemployment rate remains Poland's lowest in over 20 years. Joblessness dropped 1.7pp y/y to 8.5% in February. The trend of falling unemployment is an important pillar in Poland's economic recovery.
Also several big investments into the automotive and transport sectors in particular have been a plus and are expected to create new jobs.