External Activity Conditions

In 2021 Polish economy expanded by 5.7%, following the decline of 2.5% one year earlier. According to the quarterly national accounts, GDP has exceeded the pre-pandemic level in the second quarter already. Domestic demand rose by 8.2% yoy in 2021, while net exports subtracted 1.9 p.p. from the headline figure. Economic growth was driven by gross capital formation (23.2% yoy) and total consumption (4.8% yoy, including household consumption rising by 6.2% yoy) in almost equal proportions. The former itself was driven by a rebound in fixed investment (8.0% yoy) and strong inventory buildup which added 2.7 p.p. The entire 2021 can best be summarized as the year in which consumer demand normalized after the initial period of the pandemic, inventories were refilled and investment partially recovered.

In 2022 Polish economy will slow down to 4.0%. According to the Bank’s forecasts this will result from several factors. First, the marked wieakness in consumer sentiment (current situation is considered to be as bad as at the turn of 2012 and 2013) suggests that households’ willingness to spend is limited and consumption will decelerate. Second, we expect the contribution from investment to decline due to problems in public investment (delays, lack of projects and EU RRF funds not flowing in in measurable amounts). Third, monetary tightening will have an increasingly negative impact on economic growth, with a trough at the turn of 2022 and 23.

During 2021 domestic labour market was making up for pandemic losses very quickly, especially in its second half, after a significant relaxing of epidemic restrictions. The COVID -19 crisis, which was more like a natural disaster than a cyclical downturn, did not generate long-term negative consequences for the labour market. The government anti-crisis shields also played an important role. Concerns about employment cuts as part of the adaptation to ongoing economic situation by enterprises at the time of settling the Polish Development Fund Financial Shield that determined redemption of subsidies by maintaining employment for 12 consecutive months, did not materialize.

The unemployment rate at the end of 2021 was at 5.4% compared to 6.3% at the end of 2020. The pace of its declines in the second half of the year was faster than the pre-pandemic seasonal pattern. Polish labour market quickly turned into an „employees’ market” and labour demand remained strong, as evidenced by very high number of job offers published. In turn, average employment in the enterprise sector in December 2021 amounted to 6.362 mn, i.e. 33 thousend more than in December 2020. The fastest increase in employment took place in sectors most affected by the consequences of the pandemic, incl. accommodation, catering and trade. In turn, the biggest winner of the pandemic is the IT sector, where employment was much higher at the end of 2021 than in the period before the pandemic.

Wage growth in the enterprise sector recorded a strong rebound in 2021, to 8.6% from 4.8% in 2020. Despite the low statistical base effect, wage growth rate in the period of post-pandemic recovery exceeded market expectations. Rising wage pressure was supported by a very fast economic recovery with a gradually decreasing pool of available workers. Growing problems with the labour supply were reported by employers especially from the industry, construction and transport sectors, but also employers from the HoReCa sector, which was particularly hard hit by the coronavirus pandemic. At the same time, amid significantly elevated inflation, the risk of a breakdown in the wage-price spiral was increasing. Real wage growth in 2021 was at 3.4% yoy.

Unemployment rate in 2022 will continue to decline, but at a slower pace than in 2021 – in line with projected ”cooling” of the economy. At the end of 2022, it will stand at 4.9% compared to 5.4% at the end of 2021. Problems related to the overheated labour market will be more and more dominant. The beginning of 2022 on the labour market will be particularly difficult due to more harsh pandemic situation related to the spread of the Omicron coronavirus variant and forecasted record number of new infections and people under quarantine. The shortages in the domestic labour supply should be further complemented by the wide influx of foreigners. The „drained” labour market and forecasted very high inflation will boost wage growth to very high, double-digit levels – we assume that wages in 2022 will increase by about 11%.

Average CPI inflation in 2021 amounted to 5.1% compared to 3.4% in 2020. Inflation in 2021 turned out to be much higher than market expectations. The very quick, post-pandemic rebound in global demand encountered a barrier of much slower reconstruction of production capacities. Problems with broken supply chains, shortages of raw materials and semi-finished products pushed prices of many industrial goods to unprecedented levels in the second half of the year. This was evidenced by the high level of producer inflation (PPI) that in 2021 amounted to 7.9% on average, but at the end of the year, in December, it was already at 14.2%

Prices increases in 2021 were also driven by higher core inflation (CPI excluding food and energy prices) that increased to 4.1% from 3.9% in 2020 due to, among other things, higher prices in the service sector strongly recovering from the pandemic. Rising energy and labour costs were passed on to the prices of final goods amid persistent high demand. Inflation was also boosted by fuels due to high market prices of crude oil. Fuel prices increased by 22.9% in 2021.

Forecasting inflation in 2022 is a difficult challenge due to the Anti-Inflation Shield introduced at the beginning of the year, the main purpose of which is to reduce retail prices through lower indirect taxes on non-core items. Its duration was set until the end of July, however, it could be extended if inflation persists at an elevated level. Therefore, in the baseline scenario, we assume that the Shield will be prolonged at least until the end of 2022. The Shield will have a strong impact directly on nonbase components of inflation, such as food, fuels and energy. However, gigantic rises in energy market prices, on which business customers operate, will be readily passed on to the prices of base categories in goods and services in an environment of continued strong demand. Heavily “heated” labour market will also increase the wage-price pressure. Therefore, we expect a continuation of the strong upward trend in core inflation. Higher food prices will also make a significant contribution.

In our baseline scenario, average annual inflation in 2022 will amount to about 7% with the peak of inflation at the beginning of the year above 9% yoy. The Anti-Inflation Shield will probably save us from the scenario of double-digit inflation in the first half of 2022. The cost will be extended period of high inflation and thus delay in its return to the target for at least 2024. 9 Report on the activities of Bank Pekao S.A. Group for the year 2021 Bank Pekao S.A. The year 2021 was marked by the correction of the NBP exchange rate the central bank’s rhetoric first began to change in Spring and during the summer months the bank began signaling that rate hikes were being seriously considered. Finally, in October the NBP surprised the markets and observers by hiking interest rates for the first time since 2012 (by 40 bps). Since then interest rates rose by a total of 215 bps, the asset purchase programme was phased out completely and the reserve requirement ratio was hiked from 0.5 to 2.0%. The current tightening cycle is this century’s fastest and, according to our forecasts, its pace and scale will not decline in the coming months. By mid-2022 the NBP’s main reference rate will reach 4% (the cycle will end in July at the latest) and markets will shift their focus on the length of high interest rate period. It can easily be longer than in 2012 and 2008 and we expect the NBP key rate to remain at 4% until end-2023.

2021 was a year of fiscal consolidation after a sharp spike in public deficit and debt a year earlier. Although COVID-19 continued to be a public health challenge it ceased to exert a significant impact on the economy. The government did not reintroduce lockdowns and scaled back the anti-crisis fiscal measure significantly. Budget expenditures grew only modestly as a result (approximately 5% yoy) in 2021. Tax revenues, on the other hands, increased significantly (17% yoy) thanks to a fast recovery of the economy and acceleration of inflation (which increased tax bases). Non-tax income grew even faster (26% yoy), mainly due to rising prices of CO₂ emission allowances. The 2021 revenues from the EUA auctions exceeded PLN 25 billion, compared to PLN 10.4 billion assumed in the budget bill. Moreover, the government benefited from NBP profit of PLN 9 billion. The central budget deficit was approximately PLN 35 billion, which was significantly less than expected at the beginning of 2021 (PLN 82 billion). This was accompanied by a significant reduction in off-budget financing of public expenditure. BGK and PFR issued bonds worth PLN 39.6 billion compared to PLN 165 billion in 2020. The deficit of general government decreased – in our opinion – from 6.9 to 2.3% of GDP. Consequently, the share of public debt in GDP was reduced from 57.4 to approximately 55% of GDP.

In 2022, we expect fiscal consolidation to halt but not reverse. Our forecast for general government deficit is 2.4% of GDP. Public debt should fall further to 52% of GDP. The state budget revenues will continue to grow at a quick pace due to high nominal economic growth, payment from the NBP profit (in the amount of up to PLN 13 billion) and the constantly growing prices of CO2 emission allowances. However, public expenditure will also increase to a similar extent. We assume that the anti-inflationary shields which are set to expire in July 2022 will be extended at least until the end of year. Their total cost for the budget will reach around PLN 31billion. On the other hand, the tax reform of the Polish Deal will reduce public revenues by approximately PLN 16 billion.

In 2021 equity investors could not complain – all major stock indices followed the steep, late 2020 trends and episodes of downward corrections were rare and very shallow. Eventually, the two key US indices, S&P500 and DJIA gained 20.2 and 18.7%, respectively, German DAX rose by 12.8%, British FTSE gained 15.5% and French CAC increased by 28.9%.

FI markets saw most of the action last year. While the world made several major steps towards monetary policy normalization in 2021, the road was a bumpy one. The first episode of rising market interest rates was rather benign (a reflationary one)

• in January and February bond yields were buoyed by optimism owing to vaccination programmes, reopening of major economies and another round of fiscal stimulus in the United States following the elections. The second wave of market interest rate increases came in the third quarter and was associated with the global inflation spike seen in all possible indicators (from commodities to consumer prices). This episode continues until today, but investors were alternating between positive and pessimistic interpretations, only to settle on one that assumed front-loading of monetary tightening throughout the globe, with detrimental effects for economic growth in major economies. 2021, especially the second half, was marked by strengthening in the US dollar, driven by the perception that the US economy boasted cyclical advantages over its peers (GDP growth, progress in the post-pandemic recovery and monetary policy normalization).

In 2021 all equity indices on the Warsaw Stock Exchange rose by a double-digit pace. The rate of return on the broad WIG index amounted to 21.5%, WIG20 rose by 14.3% and midcap index mWIG40 gained 33%. Finally, the small cap benchmark sWIG80 rose by 24.6%. In 2020 the multi-year trend of net withdrawal from the stock market slowed down, but not ended – there were 19 withdrawals and 16 IPOs. The latter attracted attention of investors and WSE exhibited relatively high turnover of PLN 271.5 billion (as compared to PLN 288.6 billion in 2020).

According to the Financial Supervision Authority (KNF) data, in the period of January-November 2021 the sector generated an aggregated net profit of PLN 12.1 billion, an increase by 54% vs. the same period of 2020. The significant improvement was primarily due to lower cost of risk (the result of, among other, a better understanding of the actual economic impact of the crisis and greater optimism about future developments of the situation) coupled with rising fee and commission income, while interest income remained under pressure from low interest rates for the majority of the period (the first rate hike was enacted in October 2020).

The sector’s total operating income has grown by 2% y/y. The decline in the main component, net interest income (-4.0% y/y), caused by the low level of interest rates, has been more than made up by a sharp increase in net fees and commissions income (+16% y/y), as well as a recovery of the other income category (+14% y/y). Banks’ operating expenses were similar to the previous year’s results (+0,5% y/y), while the sector’s cost of risk fell sharply (-31% y/y) due to above mentioned reasons (in addition to base effects).

According to KNF data, at the end of November 2021 the banking sector assets amounted to PLN 2.613 billion, an increase by 11% y/y. Deposits from the non-financial sector grew by 9% y/y, while receivables increased by 4% y/y.

According to NBP data, at the end of 2021 the following developments were noted in terms of main deposit categories¹ :

• the volume of households’ deposits increased by 6.7% y/y. The growth rate was significantly lower than the one observed a year earlier – throughout the entire year 2020 dynamics exceeded 10% in this category, supported among others by public aid programs and increasing personal savings in an uncertain crisis environment,
• the volume of enterprises’ deposits rose by 10% y/y. The pace of growth in this category was also significantly lower than at the end of the year 2020 (+19% y/y), when in similarity with the retail segment, the effect of the so-called anti-crisis shields and public aid was the strongest. In 2021 the growth rate returned to “normal” levels, however it still remained relatively high,
• other deposits grew by 11% y/y, in comparison to 17% y/y growth after the year 2020.

At the end of 2021 household deposits accounted for 65%, corporate deposits for 25%, and other deposits for 10% of all deposits. Around 83% of them were covered by current deposits.

In terms of main receivables categories² , at the end of 2021 the following developments were noted:

• in yearly terms, volume of receivables from households increased by 4.8%. The pace was slightly higher compared with the one observed a year earlier (+3% y/y). A consistently high, two-digit, growth rate characterized the mortgage segment, driven by strong activity in the housing market (especially during the first three quarters of the year 2021) and a further increase of the prices of properties. Additionally a gradual recovery of the dynamics of consumer loans was also recorded, a category that was deeply affected by the pandemic,
• receivables from enterprises grew by 4.2% y/y, which is a strong rebound from the previous year’s decrease of 5,5% y/y. Credit activity in the enterprise sector increased due to a sharp revival in the economy during the entire year 2021. A steep rise at the end of the year was noted in current loans, however the dynamic of investment loans remained timid, an evidence of still strong uncertainty,
• other receivables increased by 8.2% y/y (in comparison to an exceptionally strong result of 38% y/y at the end of 2020).

As of the end of 2021 loans to households accounted for 58%, corporate loans for 26% and other loans for 16% of all loans.

Loan portfolio quality significantly increased in 2021, after a relatively moderate – taking into consideration the unprecedented character and impact of the COVID-19 crisis – deterioration through 2020. In particular:

• NPL ratio for corporate loans after November 2021 amounted to 7.7%, down from 8.8% a year before. An improvement in loan quality concerned both large companies (decrease from 5.3% to 4.4%) as well as small and medium enterprises (decrease from 11.9% to 11.1%),
• the share of non-performing loans in the portfolio of loans to households reached 5.3%, in comparison to 6.0% after November 2020. The overall improvement was mainly due to significant decrease of the ratio for consumer loans (from 11.3% to 10.1%), while in case of mortgages it remained nearly flat (2.4% compared to 2.5% after November 2020).

¹ Excluding central government institutions.
² Excluding central government institutions. Receivables include debt securities.