External activity conditions

In 2022, the Polish economy grew by 4.9%, compared to an increase of 6.8% a year earlier. Domestic demand in 2022 increased by 5.5%, while net exports reduced growth by 0.6 pp. Economic growth was almost predominantly driven by a significant increase in capital formation (17.3% yoy) – here we can see both a slight recovery in investments (4.9% yoy) and a strong rebound of inventories (+2.7 pp. of contribution to GDP growth). To a lesser extent, the growth was supported by consumption, which increased by 2.1% yoy, of which private consumption grew by 3.0% yoy. The year 2022 can be summarized as a period of weaker consumer demand due to tightening monetary policy and rising inflation, increase in inventories due to persistent uncertainty and weak demand, and a slight rebound in investments.

We estimate that in 2023, the Polish economy will slow down to 0.8% yoy. According to our opinion, this will be a consequence of several factors. Firstly, the cumulative effects of monetary policy tightening will translate into weaker consumer sentiment, and consequently, weaker demand and consumption. Secondly, lower investment growth should be expected due to the weakness of private investments, which will be offset by public investments. Thirdly, net exports will boost economic growth, but mainly due to the drop in imports and the aforementioned weakness of consumption.

In 2022, the domestic labor market fully made up for the losses caused by the pandemic crisis – in the second half of the year the unemployment rate recorded levels very close to the 20-year minimum, and employment in the enterprise sector reached its highest level in history. The unemployment rate at the end of 2022 stood at 5.2% compared to 5.8% at the end of 2021. The rate of decline was mostly in line with the seasonal pattern of previous years or slightly faster and consequently the unemployment rate last year followed a clear downward trend. The labor market bwas becoming more and more limited – with the continued strong labor demand, enterprises had difficulty recruiting new employees, as evidenced by the high number of published job offers, although it was lower than in 2021. On the other hand, the average employment in the enterprise sector amounted to 6.5 million people in December 2022, i.e. 143 thousand more than in December 2021

Wage growth in the enterprise sector recorded a marked rebound in 2022 to 12.9% from 8.6% in 2021. The driving force behind such a strong wage growth last year was inflation, which remained substantially above the NBP inflation target. As a result, up to 80% of enterprises declared an increase or persistence of wage pressure according to the NBP data. The wage growth in 2022 was often boosted by the so-called inflation bonuses. At the same time, the rapid wage growth was supported by the depleting pool of available workers. With substantially increased inflation, the decline in real wages in 2022 amounted to 1.5% yoy.

We expect the unemployment rate in the first half of 2023 will enter an upward trend for a short time, and from June it should become stagnant. At the end of 2023, it will amount to 5.5% against 5.2% at the end of 2022. Along with the slowdown in economic activity, the situation on the labor market will deteriorate slightly. This will be mainly visible through weaker wage growth, which will follow the falling inflation and the worse economic situation. Wage growth in the enterprise sector will slow down to 10.7% yoy from 12.9% yoy in 2022. Employment will stabilize or increase slightly – employers in the face of the economic slowdown will not be willing to dismiss employees due to previous problems with finding them. The Bank forecasts a slowdown in employment growth in the enterprise sector to 1.0% in 2023 from 2.4% in 2022.

The average annual consumer price index increased strongly in 2022 to 14.4% from 5.1% in 2021. Inflation in 2022 turned out to be much higher than market expectations. The consequences of Russia’s invasion of Ukraine have turned macroeconomic scenarios, including those regarding inflation, upside down. Moreover, inflation was fueled by the post-pandemic rebound in global demand, however, it lost momentum during the year. The global risk aversion and remarkably lower supply of Russian energy resources strongly boosted prices of energy and fuels. Food prices also recorded a very strong increase (on average in 2022 by almost 16%), because of high gas and fertilizers prices, as well as a limited supply of food from the East.

Inflation spilled over a wide range of goods and services due to the pass-through of high energy prices by producers and sellers into the prices of final goods for consumers (the so-called second-round effects). This was possible due to the continued high demand in the economy, supported by expansionary fiscal policy and strong labour market. Core inflation excluding food and energy prices accelerated on average in 2022 to 9.1%.

At the end of 2022, the first disinflation signals have appeared, starting from falling prices of raw materials and industrial goods. At the beginning of 2023, we will still have a surge in inflation related to phasing out the anti-inflation shield (including the return to higher VAT rates on electricity and gas bills). On the other hand, inflation would be even higher if energy tariffs for households were not „freezed” at the beginning of the year. Inflation in this cycle will peak in February at the level of about 19% yoy. In the next months, inflation will decline rapidly. For most of the year, inflation will remain in double digits, but according to our forecasts, at the end of 2023 it may fall even below 8% yoy. The rapid disinflation of non-basic factors will strongly contribute to this. Core inflation will reflect previous increases in costs and expectations, and its decline over the year will be slow. Disinflation will be supported by economic downturn, both domestic and global, as well as the end of Europe’s energy crisis and a high reference base. We forecast a decrease in inflation in 2023 to about 12% on average annually.

In 2022 the NBP’s monetary tightening cycle first accelerated, then slowed down and finally was de facto ended (although the Monetary Policy Council (MPC) only declares that the cycle was merely suspended). All in all interest rates rose by 500 bps in 2022 as the NBP reference rate rose to 6.75 bps, reaching 18-year high. The entire 2021-22 tightening cycle will be go down in history as the fastest and most aggressive one. Its de facto end can be associated with shifting focus from combating inflation to protecting economic growth. Faced with the choice between bigger tightening (even higher interest rates) and keeping them at present levels for a longer period, the MPC chose the latter. In light of November inflation report, inflation will return to target at the turn of 2025 and 2026. In our view, in 2023 the MPC will not resume the tightening cycle and its next step will be a rate cut. The Bank believes that the cycle will start in the fourth quarter and will be a slow one.

Despite the energy crisis, which is costly for the budget, current Polish fiscal indicators are favourable. Public debt is low compared to other EU countries (around 50.3% of GDP) and last year’s deficit of general government was moderate given the circumstances (probably around 3.5% of GDP). In addition, the cash reserves of the Ministry of Finance are still relatively high (PLN 99 billion at the end of January 2023) and the supply of treasury bonds at auctions is moderate. The costs of servicing public debt have so far remained low (around 1% of GDP) as a result of a decade (2011-2021) of low inflation, interest rates and yields on government bonds. It will take several years before the recent tightening of monetary policy and resulting higher bond yields will translate into an increase in the costs of servicing the entire public debt of the Polish.

This does not change the fact that the outlook for public finances has deteriorated markedly, as current statistics do not yet fully take into account:

• the costs of counteracting the energy crisis, primarily freezing or lowering electricity and gas prices for households as well as small and medium-sized enterprises, but also support for fertiliser producers and other energy-intensive industries. We estimate these costs at PLN 30-40 billion in 2023.
• an increase in military spending in connection with the war in Ukraine. The budget of the Ministry of National Defense will increase from 2.1 to 4.5% of GDP in 2023, which means an increase in military spending by PLN 65 billion. In the coming years, the financial needs for this purpose will also be high.

We believe these costs will prevent the consolidation of public finances in 2023 and the deficit will remain at a similar level to last year – we expect it to be 3.7% of GDP. Its financing will still be expensive for the budget, as the slowing economy will suppress the growth of tax revenues. Moreover, the possible reduction in interest rates will take place only at the end of the year and will be limited in scale.

2022 was not kind to equity holders – all major stock indices entered bear markets over the course of 2022, although the declines were not steady. Eventually, S&P500 lost 19.4%, German DAX dropped by 12.4%, French CAC40 declined by 9.5% and British FTSE250 declined by 19.7%. There were massive increases in bond yields over that period (as much as 400 bps). This means that standard stock-bond portfolios experienced large losses and 2022 might have been the worst such year in modern history. The main reason for this was the considerable monetary tightening by major central banks in response to inflation. The central banks’ strategy was not favorable to risk assets – interest rate paths were revised upward and upward, the extent of the hikes was considerable and central bank rhetoric emphasized the need to bear the costs of disinflation here and now.

In 2021 all equity indices on the Warsaw Stock Exchange dropped considerably, following foreign benchmarks. The rate of return on the broad WIG index amounted to -17.1%, WIG20 declined by 20,1% and midcap index mWIG40 lost 21.5%. Finally, the small cap benchmark sWIG80 declined by 12.8%. In 2022 the multi-year trend of net withdrawal from the stock market slowed down, but not ended – there were 22 withdrawals and 8 IPOs. Interest in the Warsaw Stock Exchange has decreased – the total value of turnover on the stock market amounted to PLN 286 billion in 2021 (in 2021, the value of turnover amounted to PLN 313 billion).

According to the data of the Polish Financial Supervision Authority (KNF), the aggregated net profit of the banking sector in 2022 amounted to PLN 12.5 billion and doubled (+108%) compared to the corresponding period of 2021. Its volatility was increased by provisions made by banks increasing the cost of risk (+45% compared to 2021). The operating result, which does not include such one-off events, increased by 59% in 2022 after an increase of 20% in 2021. Net interest income increased by 63%, which should be associated with the increase in interest rates that took place from the end of 2021. Although in the initial phase of the cycle of MPC rate hikes, a greater impact of higher rates was observed on the side of revenues than interest costs, but throughout 2022, interest costs increased almost 10 times with revenues increasing by 134%. At the same time, the sector’s commission income grew (by 7.6%). Total operating revenues of the sector increased by 38% y/y. Banks’ operating expenses increased significantly (by 24%), which resulted from higher general administrative expenses and higher staff costs.

According to KNF data, at the end of December 2022 the banking sector assets amounted to PLN 2.741 billion, an increase by 6.6% y/y.

According to National Bank of Poland (NBP) data, at the end of 2022 the following developments were noted in terms of main deposit categories:

• the volume of households’ deposits increased by 3.5% y/y. This was markedly lower than the growth rate recorded in 2021 (typically well above 5%) when it was supported by government transfers and precautionary savings. In 2022 household savings declined and at the same time funds were shifted from overnight into term deposits;
• corporate deposits rose by 11.6%, little changed from 2021 and high growth rate in the deposit base was facilitated by weak PLN and very strong corporate earnings (aggregate profit of the nonfinancial sector doubled compared to the pre-pandemic norm in nominal terms),
• other deposits grew by 2% y/y, in comparison to 28% y/y growth in 2021.

At the end of 2022 household deposits accounted for 61%, corporate deposits  25%, and other deposits – 14% of all deposits. Around 83% of them were covered by current deposits.

In terms of main receivables categories, at the end of 2022 the following developments were noted:

• in yearly terms, volume of receivables from households declined by 3.8% – a first full-year decline in history. While consumer credit contracted by 2.8% yoy, the main reason for this was the considerable decline in mortgage loans (by 2.8% yoy), In 2022 not only did new production of mortgages tumble (from 7-8 bn PLN per month during the late 2021 peak to 2-3 bn PLN) but also there was an uptick in prepayments.
• receivables from enterprises grew by 9.7% y/y, which amounts to an acceleration vis-à-vis the end of 2021 (4.3% yoy). Credit growth was boosted by entrepreneurs’ bigger needs to finance working capital expenses amid high inflation and on-going restocking.
• other receivables increased by 15.8% y/y

As of the end of 2022 loans to households accounted for 56%, corporate loans for 28% and other loans for 16% of all loans.

Loan portfolio quality continued to improve in 2022 despite the extent of monetary tightening and the on-going slowdown of the real economy. In particular:

• NPL ratio for corporate loans after December 2022 amounted to 6.4%, down from 7.3% a year before. An improvement in loan quality concerned both large companies (decrease from 4.1% to 3.4%) as well as small and medium enterprises (decrease from 10.7% to 9.6%).
• the share of non-performing loans in the portfolio of loans to households reached 4.9%, in comparison to 5.0% after December 2021. The overall improvement was mainly due to significant decrease of the ratio for consumer loans (from 9.4% to 8.6%), while in case of mortgages it remained nearly flat (2.0% compared to 2.3% after December 2021).