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2018 Financial and Social Report

The year 2018 was a very good period for the Polish economy. The growth in the gross domestic product surprised positively and in the entire 2018 it amounted to 5.1%, which was one of the best results among the European Union member states. It will also mean an improvement in relation to very good 2017, when the GDP grew by 4.8%. The main driving force of the Polish economy was consumption demand. Record low unemployment and growing wages strengthened the optimistic sentiment of households and hence their tendency to consume. Public investments, mainly for infrastructural purposes, supported by further absorption of funds from the European Union budget were also a strong boon to the economy. At the same time investments of private companies grew much slower. In total, domestic demand was growing in 2018 at a dynamic pace, offsetting the impact of the less favourable external environment of the Polish economy and the negative contribution of net exports to economic growth.

However, the end of 2018 brought some signals of slowing economic growth. In particular, industrial production and retail sales in December turned out to be weaker than in previous months and the GDP growth decelerated in Q4 to 4.8% YoY from 5.1% YoY in the preceding quarter.

Fast economic growth supported unprecedented improvement in the situation on the labour market. Persisting strong demand for labour brought about an increase in the number of employed persons, which was in Q3 2018, according to the Labour Force Survey, the highest since records began – 16.6 million people. The growth in employment resulted in a decrease in the unemployment rate, which according to the Eurostat methodology, dropped in May 2018 to 3.8%, i.e. to the lowest level in history. Increasing difficulties with recruitment and high level of capacity utilization accelerated wage growth in companies. It was accompanied by increase in the public sector’s wages. Overall, growth in the average monthly salary in the whole of the economy reached 7.7% YoY in 4Q 2018 and was the highest in 10 years.

However, the last months of 2018 showed signals of a weakening economic situation on the domestic labour market. The declining trend in unemployment has slowed down, which is in line with the weaker demand in part of the economy as confirmed by the declining number of newly created jobs. In addition, the employment growth rate in the enterprise sector is gradually decelerating – in December it amounted to 2.8% YoY, while in January 2018 it was at 3.8% YoY. This decline was however in part caused by the persisting difficulties of some enterprises to recruit employees with the necessary qualifications.

Despite the high economic activity and rise in labour and production costs, inflationary pressures remained low. Core inflation measured as the CPI index excluding food and energy prices amounted in 2018 to an average of 0.7%, same as a year before. Consumer prices were driven to the greatest extent by supply factors – food prices as well as energy, which was related to oil prices growing significantly for most of the year on world markets. In 2018, however, the impact of these factors was slightly weaker than in the previous year – average annual CPI inflation dropped to 1.6% from 2.0% in 2017.

In the environment of relatively low inflationary pressure the Monetary Policy Council maintained a loose monetary policy stance in 2018. The reference rate is record low and currently stands at 1.50%. In the Bank’s assessment the NBP official interest rates will remain at current levels in 2019 as well.

In 2019, economic growth will normalize, but it will still be one of the fastest in the European Union. Available data indicate a slowdown in economic growth in major economies, including the United States, Germany and China. The global environment will therefore be less favourable than in the previous year. However, internal demand should remain robust and its structure similar to last year’s. Private consumption will still be the main driver of the economy. However, along with the slightly weaker growth in the real wage bill the consumption growth rate will be lower than in 2018. GDP growth will also continue to be supported by public investments, mainly in the infrastructure, which will be bolstered by further use of EU funds. However, due to supply constraints in the construction sector their growth will gradually slow down. The increase in private investments, against the backdrop of the weakening economic situation in the country and abroad, gives no grounds for a clear acceleration. Despite a slowdown in global economic activity, the drop in exports’ growth should not be strong, as Polish enterprises are highly competitive in price terms and the zloty exchange rate will partially absorb the impact of the less favourable external environment. One factor potentially limiting the scale of the slowing economy in 2019 is fiscal policy in connection with this year’s election period in Poland.

Despite weaker economic growth inflation in Poland will accelerate this year. The cost pressure in the economy will increase because the still robust wage growth will be accompanied by a stronger decrease in productivity growth. CPI inflation may thus exceed the NBP’s inflation target of 2.5% YoY, but only at the end of the year. However, this forecast is subject to heightened uncertainty due to increases in energy prices on the wholesale market and its impact on prices for households. The expected relatively low CPI inflation will support the current scenario of the Monetary Policy Council, according to which interest rates will not change for at least a year.