External Activity Conditions

According to the flash estimate from Statistics Poland, on 2023, the Polish economy grew by approximately 0.2%, compared to an increase of 5.3% a year earlier. According to the Bank’s estimates, domestic demand in 2023 decreased by 4.1%, while foreign trade added 5.4 p.p. to the growth. Growth was hampered mainly by gross accumulation, of which 7 p.p of GDP growth was taken away by inventories. Consumption remained a small drag on growth as it declined by 0.1%, of which household consumption dropped by 1% yoy. The year 2023 can be summarized as the last period of slowing consumer demand before GDP recovery due to tightening monetary policy and rising inflation, destocking due to subsiding geopolitical uncertainty and further slowing demand and strong investments.

In 2024, the Polish economy will start to rebound, and GDP growth will amount to 3.0% yoy. In our opinion, this will be a consequence of several factors. Firstly, the recovery of real consumer income, due to the further but slower disinflation process and elevated wage growth, will trigger a rebound in consumption, which will be the main driver behind stronger growth this year. Secondly, a decline in investment is expected due to the weakness of private investment and the slow recovery of public investment. Thirdly, the weak economic situation in the eurozone and the simultaneous domestic consumption rebound will translate into a negative contribution of net exports.

2023 brought a cooling of the domestic labor market. After the economic recovery in 2022, employment in the corporate sector gradually slowed down last year and although the unemployment rate decreased by 0.4 p.p. during the year, it stagnated for five months in the second half of 2023.

The unemployment rate at the end of 2023 amounted to 5.1% compared to 5.2% at the end of 2022. The rate of its decline was clearly slower than in previous years, which clearly illustrates the condition of the Polish labor market and the entire economy in 2023. This was a direct result of weakening consumer demand in response to unprecedented monetary tightening. Despite the economic slowdown, the unemployment rate continued to fall towards, but did not reach its historic low (4.9%). The lack of significant increases in the unemployment rate is the result of the continuing tightness in the labor market and employers’ anticipation of the upcoming economic rebound. As a result, the average employment in the enterprise sector in December 2023 amounted to less than 6.5 million people compared to a similar result in the previous year.

Wage growth in the enterprise sector began to slowly shrink in 2023, following inflation. On average, wages increased by 11.9% compared to 12.9% in 2022. The growth was driven by the CPI that remained above the NBP inflation target and the high wage claims, lagging behind the fall in inflation. On the other hand, weakening inflation expectations began to translate into lower, but still double-digit wage growth, especially in the second half of the year. Wage growth in 2023 has been repeatedly boosted by various inflation bonuses. Real wage growth in 2023 amounted to 0.3% but at the end of the year reached over 4%.

The unemployment rate will slightly increase in the first quarter of 2024 due to seasonal factors but will begin to decline again at the turn of the first two quarters to reach its historic low in mid-year. At the end of 2024, the unemployment rate should decrease to 4.8% from 5.1% a year earlier. In turn, wage growth will follow a downward trend, but much slower than inflation in 2023. As a consequence, real wages will grow at a fast pace, at times exceeding 6% yoy. Real wages in the enterprise sector will grow by 5% in 2024, and nominal wages by 9.3%. Moreover, the Bank forecasts a slowdown in employment growth in the enterprise sector to -0.1% in 2024 from 0.2% in 2023.

As expected, 2023 was the year of not only Polish, but also global disinflation, especially in non-core factors (food, energy, fuel). In Poland, a dynamic drop in consumer inflation (to 6.2% yoy at the end of the year from just over 18% in February, when we recorded the maximum) was caused by several factors. Firstly, the relatively mild course of the energy crisis in Europe translated into declines in energy prices. Secondly, the 2022 events and extremely high price increases in many categories have created a high reference base. Thirdly, at the end of 2022, global prices of raw materials, industrial goods and freight were falling. The global full scale of disinflation of industrial goods came to Poland with a delay, accelerating the process of general disinflation in the second half of 2023. Finally, the effects of monetary tightening had the greatest impact.

At the end of 2023, the period of rapid disinflation has been gradually coming to an end. However, the first quarter of 2024 will bring a continuation of inflation decline and the shape of inflation path in the following months will depend heavily on regulated factors. If the assumptions of Bank Pekao economists are implemented: a return of 5% VAT rate on food products (from the beginning of the second quarter) and new energy tariffs for households (freezing until mid-2024, then introducing other protective measures partially mitigating return of tariff rates administrated by the Energy Regulatory Office), CPI inflation in March will reach a minimum of around 3% yoy. Inflation will be within the band for deviations from the NBP inflation target for a while and then accelerate in the second half of the year to approximately 4.5-5% at the end of the year. However, this rebound will be based solely on non-core factors. In turn, core inflation will decline asymptotically over the course of 2024, amid the persistent negative output gap, restrictive monetary policy, final phasing out of the energy shock, declining growth of unit labor costs and still high reference base in the first half of the year. The return of inflation permanently to the NBP target is still uncertain (not earlier than the second half of 2025). On yearly average, CPI will drop significantly in 2024 to 4.3% from 11.4% in 2023.

In turn, the NBP reaction function changed to a more restrictive, shifting from a loose policy in 2023 (rate cuts by a total of 100 bps). Interest rates in Poland will stay „higher for longer”. According our opinion, the Monetary Policy Council will leave interest rates unchanged in 2024, taking into consideration forecasts of higher inflation in the second half of the year and a stronger rebound in consumption than previous predictions. The risk of corrective cuts exists, but due to the external factors (rate cuts abroad) and the risk of PLN excessive appreciation.

Last year the fiscal stance of Polish government has somewhat deteriorated. The expenditures of central budget have increased by as much as 28% yoy (for Jan-Nov ’23), much faster than revenues (14% yoy), especially tax revenues (9% yoy). The year-end deficit can be expected to reach PLN 90 billion, up from PLN 12.5 billion in 2022. However, this increase in the deficit is partly a cognitive illusion as a result of the normalization of the Finance Ministry’s budget policy. Previously, in 2020 and 2021, it had a habit of advancing a large part of public spending a year ahead and shifting it to off-budget funds (BGK and PFR). In 2022, it reverted to more standard rules – the lack of advance payment meant that the deficit then amounted to only 12 of the planned PLN 40 billion. The side effect was an increase in the 2023 deficit by about PLN 30 billion.

The deficit of the general government as a whole – that is, in addition to the budget, also extra-budgetary funds and local governments – rose from 3.7 to about 4.9% of GDP with risks on the higher side. The reason for the increase in the gap in public finances was primarily the cost of antiinflationary shields, i.e. the freezing of electricity and gas prices for sensitive consumers and the introduction of a zero VAT rate on food. In addition, armament spending increased (as an indirect effect of the war in Ukraine). Tax revenues, in turn, were permanently lowered belatedly by the reform of the PIT (Polish Deal).

A high deficit is also planned for 2024, with the state budget expected to reach a record PLN 184 billion and the entire public finance sector 5.3% of GDP. Its source, in addition to high spending on defense and anti-inflationary shields (which will be gradually phased out), will be an increase in social benefits (including an increase in 500+ to 800+) and salary increases in the public sector. Net borrowing needs will exceed PLN 200 billion. Most of them will be covered by the domestic banking sector. This will be possible thanks to operations to swap money bills (accumulated from the time of COVID issues) for newly issued Treasury bonds. Banks’ demand for government debt securities will be further supported by persistent excess liquidity (vide the sustained downward trend in the loan-to-deposit ratio, L/D, in November 2023 L/D fell below 70%), as well as by regulatory factors (the removal of sell/buy/back (SBB) transactions, a commercial variant of repo, from the bank tax). We estimate that the decline in L/D we anticipate in 2024 will translate into approximatly 1:1 increase in demand for bonds/vouchers.

2023 was not kind to bond holders, but equities brought a hefty return as all major stock indices entered bull market over the course of 2023. At the end of the year, S&P500 gained 24.2%, German DAX earned 20.3%, French CAC40 increased by 20.1% and British FTSE250 rose by 3.8%. The increases in bond yields were much smaller than in 2022. However, it wasn’t the scale, but the levels reached by yields and the lack of widely expected declines. Forecasts of a decline in yields did not materialize, which was primarily due to the relative resistance of major economies to monetary tightening, resulting in serial upward surprises in macroeconomic data and supporting the „higher for longer” rhetoric common in the world of central banking. In addition, some investors were speculation about possible structural shift upward in interest rates globally. This debate is far from settled, but central banks do not subscribe to that view and are moving towards monetary easing.

In 2023 all equity indices on the Warsaw Stock Exchange rose considerably, following foreign benchmarks. The rate of return on the broad WIG index amounted to 36.5%, WIG20 rose by 30,8% and midcap index mWIG40 gained 39.3%. Finally, the small cap benchmark sWIG80 rose by 30,9%. In 2023 the multi-year trend of net withdrawal from the stock market slowed down, but not ended – there were 12 withdrawals and 10 IPOs. WSE exhibited relatively low turnover of PLN 274 billion (as compared to PLN 286 billion in 2022).

According to the Financial Supervision Authority (KNF) data, covering the period until December 2023, the sector generated an aggregate net profit of PLN 27.9 billion, an increase of 159.4% compared to the same period of 2022. The entire 2022 had been closed with aggregate net profit of PLN 10.7 billion. Such a strong result is primarily associated with historically high interest rates (the NBP key rate amounted to 5.75% at the end of 2023, even after two rate cuts in the latter half of the year). In 2023, apart from strong interest revenue growth (by 41.8% yoy), the sector has also seen significant increases in interest costs (63.7% yoy). It is worth noting that operating cots barely changed (PLN 50.7 billion in 2023 compared to PLN 49.8 billion in 2022) despite strong nominal wage growth (on average 12.2% yoy) – this was made possible by cuts in general management cots. Cost of risk declined by 32,4% yoy.

The volume of households’ deposits increased by 11.2% y/y with double digit growth prevalent since May. Such a high growth rate may be indicative of household’s increased willingness to use the improvement in economic fundamentals and high interest rates to rebuild real savings, Corporate deposits rose by 8.8%;

This category is slowing down visibly (the peak was at 17.2% in February 2023), which might fit the pattern of improving corporate sentiment and their optimism on the economy in 2024.

Incerease other deposits by +3.8% y/y, in comparison to 1.9% y/y in 2022.

Household deposits accounted for 61%, corporate deposits 25%, and other deposits 14% of all deposits. Around 83% of them were current deposits.

In terms of main receivables categories, at the end of 2023 the following developments were noted:

The volume of receivables from households decreased by 2.2% year-on-year, mainly due to the decline in the value of housing loans in 2023. Sales of new housing loans in the first quarter of 2023 amounted to PLN 2 billion, and then increased significantly, to PLN 9 billion in November. The reasons for this recovery were the easing of monetary policy, government support and a general improvement in household sentiment.

A 3% y/y decline in receivables in the corporate segment, in addition to the economic slowdown reducing the demand for corporate loans, was influenced by the high base related to working capital financing in 2022. An increase of 14.3% y/y in other loans.

At the end of 2023, receivables from households accounted for 56% of the total portfolio, receivables from enterprises 27%, and other loans 17%.

Loan portfolio quality maintained its historically high levels as the NPL ratio stood at 4.0% in December, falling from 4.3% in the same period of 2022, despite the business cycle trough occurred in the period.

NPL ratio for corporate loans after December 2023 amounted to 6.1%, down from 6.4% a year before. An improvement in loan quality concerned mainly small and medium enterprises (decrease from 9.6% to 8.2%),

The share of non-performing loans in the portfolio of loans to households reached 5.0%, figure seen at the same period of 2022. Unchanged solvency occurred in the mortgage sector (2.2%), while consumer loans have improved their quality.