Macro Flash: It’s already early spring in the economy

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• 2024 in the global economy will be marked by rate cuts amid previously expected by us "a soft landing" scenario materializing. We assume that in 2024 the FED will conduct 4 interest rate cuts, by 25bp each, to 4.35-4.50%, and the ECB will conduct 3-4 rate cuts to 3.50%-3.75%. Both should start no later than mid-year. This will be a reaction to ongoing disinflation (very close to 2%) with at most moderate economic growth (finally in the USA, still in the euro zone). In our opinion, the US economy will face a “soft landing”, while a possible technical recession in the euro area during 2h23 should be temporary.
• The domestic economy has more than fulfilled our scenario of consumer awakening (presented in our previous report) and the beginning of general recovery. GDP in 3Q23 increased by 0.5% y/y. Consumption was a positive surprise (+0.8% y/y), even against the background of our forecast, which was significantly higher than the consensus. Investments also grew solidly (+7.2% y/y), although a much stronger increase in expenditures by large companies boosted an appetite for even better results. The solid GDP growth in 3Q23 is only a prelude to an even stronger recovery in the following quarters. We forecast that in 4Q23 GDP growth will exceed 2%, then 3% in 1h24 and 4% in 2h24. Our optimism results from increasingly improving prospects for household incomes (strong labour market, pay rises in the public sector), stronger than expected investment activity of companies and unfreezing of RRF funds. We estimate that investment growth will add 1.1 pp to GDP growth (against our previous estimate of 0.5 pp), while private consumption will add 2.4 pp (against 2.2 pp assumed previously).
• A solid economic recovery heralds a return to the old challenges on the labour market, i.e. increased competition for employees and the growing importance of supply constraints. In such an environment and with improved competitiveness of employment in the public sector, wage dynamics in the national economy will remain clearly above 10% y/y, and the registered unemployment rate will set new record lows. High nominal wage growth in conditions of significantly lower inflation than on average in 2023 will translate into a significant acceleration of real wage growth in 2024, to approximately 7% on average. Female professional activity is growing - proposed solutions to activate mothers will help to maintain this trend, but the national economy is becoming more and more dependent on immigration.
• Better prospects for economic growth are the result of, among others, a looser fiscal policy than we had assumed so far. We have increased the general government deficit forecast for this year, and in 2024 the deficit will be only slightly smaller than in 2023. We currently estimate that the general government deficit will increase to 5.9% of GDP in 2023, and in 2024 it will decrease to 5.6% of GDP. The additional fiscal impulse will be directed mainly to consumption. The increased deficit is largely the sum of discretionary (potentially temporary) factors, i.e. a sudden increase in military expenditure by 2% of GDP, expenditure on energy shields (gradually decreasing over time), the extension of the 0% VAT rate on food items, which we assume will apply by the end of 1h24, and the implementation of election promises. The structural primary deficit i.e. excluding debt servicing costs (approx. 2% of GDP over the projection horizon) and adjusted for the impact of the business cycle, will increase from approx. 3% of GDP in 2022 to 3.5-4.0% of GDP in 2023 and 2024, and decrease towards 2% of GDP in the following years. Hence, the consolidation of public finances will start later and will proceed at a slower pace.
• Regulations still play the leading role in inflation forecasts, but we focus on the favourable trends in core inflation, which is gradually losing momentum. The revision of our CPI inflation forecast for 2024 is mainly due to the adjustment of assumptions regarding regulatory changes. M.Morawiecki's government extended the reduced VAT rate on food until 1q24. We assume that this solution will also be valid in 2Q24. The act signed by the President assumes maintaining frozen energy prices in the first half of 2024. We still believe that the government may decide to extend this solution also for the second half of the year. A slightly lower starting point for core inflation lowers its path in the first half of the year. At the same time, however, the prospect of a faster recovery in consumer demand than previously expected and closing of the negative output gap in the further part of the forecast horizon will limit disinflation. As a result, we still assume that core inflation will remain above 5% at the end of 2024 (which means that in the entire 2024 it will decrease by only 1 percentage point). We have two years ahead of us with average annual inflation of approximately 4% and there is still a long way to reach the inflation target.
• In the domestic monetary policy, after an emotional autumn, it is time for hibernation - great uncertainty, including regarding fiscal policy, prompted the MPC to adopt a wait-and-see approach. A clear drop in inflation at the beginning of 2024 may wake up the MPC in March, opening the way to another (one-off) adjustment of rates. At the end of 2024, the appreciation of the Polish zloty under the pressure of the Fed/ECB rate cuts may provide arguments for reducing the NBP rates. In total, we expect two rate cuts of 25bp each by the end of 2024 (the reference rate will drop to 5.25% at the end of next year). We expect that the cycle will continue in 2025 (also at a slow pace), and at its end the reference rate will fall to 4.5%.
• Weakened external demand, combined with growing domestic demand, will hamper the improvement in the trade balance in mid-2024. However, external balance will remain a solid trump-card of the domestic economy, and the inflow of funds from the EU will additionally reduce the need for foreign sources of financing and improve the capital account. We forecast that the current account surplus will exceed 1% of GDP at the end of 2023 and will remain above this level in 2024, but will no longer increase.