Millennium economic forecasts. Grzegorz Maliszewski on consumption, investments and rising inflation in 2022

2021 was a year of dynamic economic recovery after the pandemic shock. According to preliminary data from Statistics Poland, GDP growth in the whole of the previous year amounted to 5.7%. This result exceeded even the most optimistic forecasts from the beginning of last year. The Polish economy returned to the level from before the breakout of the pandemic already in Q2 2021. This is two quarters earlier than the economy of the entire European Union. The economy was driven by private consumption and the build-up of stocks. It should be noted, however, that investments in fixed assets also grew more strongly than expected. Despite the continuing uncertainty, investments of large enterprises increased in January-September last year by 11.6% y/y nominally.

However, recent months have brought an increase in risks to economic growth in the medium term. It is primarily high inflation, the taming of which will require radical increases in interest rates. In my scenario, I assume an increase in the reference rate to 4%. This is a jump of 390 basis points, compared to the beginning of the cycle in October 2021. Such a large scale of monetary tightening has not been seen in Poland's recent economic history. This will obviously have a negative impact on consumption, but also on investments, although it should be remembered that the dominant part of capital expenditures is financed by companies from their own funds. The slowdown in consumption will be exacerbated by high inflation, which will limit the purchasing power of income. The outlook for inflation remains unfavourable, and rising energy prices and inflation expectations, which translate into higher wage demands, increase the risk of maintaining elevated inflation for an extended period of time. Over the next two years, CPI inflation will fall far short of the central bank's target.

The slowdown in consumer demand will, over time, limit the possibility for producers and traders to pass on higher production and supply costs to retail prices. It can be assumed with great confidence that wage and energy costs will increase. This means that the deterioration of companies' financial results is a real prospect. Not only high costs will interfere with running a business. In January this year, for the first time in the history of the Statistics Poland survey, i.e. since 2001, inconsistent and unstable legal regulations were a stronger barrier to business for industrial processing companies than the amount of tax burden. In the trade and construction sector, this had already happened a few months earlier. The unfavourable legal and institutional environment has become one of the dominant restrictions on economic activity. This is undoubtedly the effect of chaos during the introduction of the Polish Order.

Such conditions are not conducive to investments, and investment needs are significant. High utilisation of output capacity, popularisation of e-commerce, and above all the need to improve energy efficiency are associated with the need to increase investment outlays. This is a prerequisite for improving the competitiveness of the economy, which began to deteriorate last year, as reflected in the decline in terms of trade. This year, economic growth will still be decent, thanks in large part to the good results of 2021, and the so-called transfer effect will be 4.5% in my opinion. However, the medium-term growth outlook is deteriorating.

Grzegorz Maliszewski, Chief Economist of Bank Millennium