Poland Macro Weekly: Destructive flood, but the economy will bear its costs

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TOP MACRO THEME(S):

• All calm on the housing market (p. 2) – After several years of turbulence, the supply and demand are balanced and market looks more predictable.

WHAT ELSE CAUGHT OUR EYE:

• Industrial production in August disappointed once again, falling by 1.5% y/y after a 5.2% y/y rise in July. After seasonal adjustments, production decreased by 0.8% m/m. Prolonged stagnation in Germany coupled with PLN appreciation, as well as continued de-stocking constrain activity of the Polish manufacturing.
• The average gross wage in the enterprise sector in August increased by 11.1% y/y (6.5% y/y in real terms). The double-digit wage growth rate may continue until the end of the year, but it will likely slow down to 7-8% y/y in 2025, with less support from regulatory factors. The average employment fell by 0.5% y/y. Monthly employment decline was the sharpest in recent years.
• The state budget deficit at the end of August rose to PLN 88.7bn (48.2% of the annual plan). We observe gradually increasing VAT revenues (also in relation to GDP) and declines in CIT. On the expenditure side, the increase is driven by, among others, social benefits, higher debt servicing costs, subsidies for local governments, and defense spending.
• Consumer sentiment improved in September, with improvement in all its components. Thus, deterioration of the sentiment in summer has proved transitory and was probably linked to the unfreeze of energy prices.
• Flood in Lower Silesia, despite heavy devastation locally, should not have significant economic consequences on a macro scale. At this stage, it is not possible to estimate the value of the losses, but property losses from the 1997 flood amounted to 2.3% of GDP, and in 2010 to about 0.9% of GDP. In 2010, about 20% of the reconstruction costs were covered by the state budget, with the rest paid by insurers, private individuals, businesses, local governments and the EU. EU funds will again help in rebuilding – Poland should promptly receive additional EUR 5bn in cohesion funds, according to the European Commission.

THE WEEK AHEAD:

• Monday will bring next activity indicators for August – we estimate that construction output decline deepened and retail sales growth moderated.

NUMBER OF THE WEEK:

• 50bps – FOMC started rate cuts with a big step which may encourage the Polish MPC to resume NBP rate cuts earlier than rate-setters suggested so far.

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