Economic Analysis Department

Warsaw / 9th March 2020

Inflation and economic growth projection

of Narodowy Bank Polski

based on the NECMOD model

Inflation and economic growth projection of the NBP

Projection 2020 – 2022

▪ Economic condtions

abroad

▪ Polish economy

▪ GDP

- Consumption demand

- Investment demand

- Foreign trade

- Changes between

rounds

▪ Inflation

- Changes between

rounds

Uncertainty

Outline:

2

1 Projection 2020 - 2022

2 Uncertainty

Outline

Inflation and economic growth projection of the NBP 3

March projection compared to November projection – main changes

Impact on GDP Impact on CPI

Weaker global economy outlook due to the outbreak of coronavirus epidemic

Signing Phase One deal between US and China

Lower than expected economic growth in Poland in 2019Q4

Households have become more cautious about spending

Stronger than expected in November increase in prices of waste disposal services

Higher than assumed in the budget bill excise tax on alcoholic beverages and tobacco

products from 1st January 2020 and planned introduction of additional fees on beverages

containing substances used for their sweetening properties, as well as additional fees on

sales of alcoholic beverages of up 300ml in volume

Higher pork prices growth in global markets in 2019-2020 due to the escalation of the ASF

epidemic and slower than expected process of rebuilding the pig herd in China

Higher than expected increases in tariffs on the sale and distribution of electrical energy

Inflation and economic growth projection of the NBP 4

The impact of coronavirus outbreak on the global economy and Poland

▪ Assumptions in the baseline scenario of the projection: significant slowdown in GDP growth in China and the global economy,

however, concentrated mainly in the first and beginning of the second quarter of this year.

▪ The most important canals of coronavirus epidemic impacting global economy:

▪ Slump in global demand for transport, tourism and entertainment services - hence – lower oil prices leading to deterioration of

economic outlook in countries dependent on the income from sales of this commodity.

▪ Decrease in demand for non-food goods, so far mainly in China and north Italy, later probably also in other countries.

▪ Heightened volatility in financial markets, deterioration in business sentiment.

▪ In the immediate vicinity of Poland: slowdown in services sector in some big euro area economies and in manufacturing sector

in Germany.

▪ A risk of further reduction of manufacturing production and quarantine of more regions in China, difficulties in global value chains,

obstacles for producers worldwide dependent on Chinese subcomponents.

▪ In case of more severe coronavirus epidemic – deeper downward revision in the forecast for economic growth in Poland (pessimistic

scenario – see the balance of risks).

▪ Further spread of the coronavirus epidemic will most likely lead to lower inflation:

▪ lower inflation will be a result of decreasing demand for a large part of services and non-food goods, intensification of promotions

and extraordinary price reductions

▪ the supply effect, related to a reduction in the supply of some intermediate goods and an increase in demand for some food

products, may be conducive to rising inflation.

Inflation and economic growth projection of the NBP 5

Impact of stronger demand and wage pressure on core inflation in line with expectations.

Core inflation projection in subsequent projection rounds (y/y, %)

-0.5

0

0.5

1

1.5

2

2.5

3

16q1 16q3 17q1 17q3 18q1 18q3 19q1 19q4

core inflation Nov 19 Jul 19 Mar 19 Nov 18

Jul 18 Mar 18 Nov 17 Jul 17 Mar 17

Source: NBP calculations

Inflation and economic growth projection of the NBP

Projection 2020 – 2022

▪ Economic condtions

abroad

▪ Polish economy

▪ GDP

- Consumption demand

- Investment demand

- Foreign trade

- Changes between

rounds

▪ Inflation

- Changes between

rounds

Uncertainty

Outline:

6

Projection 2020-2022

Economic conditions abroad

Inflation and economic growth projection of the NBP 7

External GDP growth will remain sluggish in the coming years

Import dynamics in the global economy (%, y/y, 3-m. average)

Source: Datastream, Markit Economics, OECD, CPB Netherlands, NBP calculations.

Global GDP (%, annualized q/q)

GDP y/y, % 2020 2021 2022

Euro area 0.9 (1.1) 1.3 (1.3) 1.3

Germany 0.6 (0.6) 1.3 (1.2) 1.2

Great Britain 1.1 (1.2) 1.0 (1.3) 1.3

US 1.9 (1.7) 1.8 (1.7) 1.9

China 5.1 (5.8) 6.5 (5.7) 5.7

NBP forecast (values from the November 2019 projection are given in brackets)

 Signing trade agreement Phase One between China and United

States.

 Monetary and fiscal loosening in the global economy.

 Spread of coronavirus epidemic.

 Prolonging period of slowdown in Germany.

 Increase in trade barriers between Great Britain and European

Union from 2021.

-2

0

2

4

6

2017 2018 2019

US Japan Euro area China Asian emerging markets Other economies Global economy

0

1

2

3

4

5

2013 2014 2015 2016 2017 2018 2019 2020P 2021P

Indicators with values higher than in the November projection are marked green, and indicators with lower values are marked red.

Inflation and economic growth projection of the NBP 8

In the euro area the GDP growth remains sluggish, however economic conditions in various sectors

differ.

Source: Eurostat, European Commission, Markit Economics, Datastream, NBP calculations

Business climate in the euro area (PMI, p.) Wages and employment in the euro area

Investment in machinary and equipment vs Eurozone exports of goods

(index, 2015=100) GDP growth in the euro area (% and p.p., y/y)

Note: The chart does not include Ireland.

-0.5

0.0

0.5

1.0

2017 2018 2019 Private consumption Public consumption GFCF

Change in inventories Net exports GDP

45

48

50

53

55

58

60

2018 2019 2020

Manufacturing Services Construction

6

7

8

9

10

11

12

13

-3

-2

-1

0

1

2

3

4

2005 2007 2009 2011 2013 2015 2017 2019

Employment (%, y/y) - LHS Wages (%, y/y) - LHS Unemployment rate (%) - RHS

-20

-15

-10

-5

0

5

10

15

2007 2009 2011 2013 2015 2017 2019

Investment in machinery and equipment Export of goods

Inflation and economic growth projection of the NBP 9

Economic growth in the United States will be lower than in recent years.

Source: BEA, BLS, US Census, NAHB, CBO, ISM, NBER, NBP calculations.

GDP dynamics in US

(% and p.p, q/q saar)

ISM Index for manufacturing and services (points, sa) Private investment outlays dynamics (%, and p.p. q/q, saar)

Rate of unemployment and its natural level according to CBO (%, sa)

-3 -2 -1 0 1 2 3 4 5 6

2017 2018 2019 Private consumption GFCF

Changes in inventories Net exports

Public investment GDP

3

4

5

6

7

8

9

10

11

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Rate of unemployment Natural rate of unemployment

30

35

40

45

50

55

60

65

2007 2009 2011 2013 2015 2017 2019

Manufacturing Services

-9

-6

-3

0

3

6

9

12

15

2014 2015 2016 2017 2018 2019

Residential construction Intellectual property Machinery and equipment Non-residential investment Total private investment

Inflation and economic growth projection of the NBP 10

Trade agreement betweeen China and US as well as ratification of USMCA trade deal reduce

uncertainty related to trade policy. China’s exports to the United States (%, 3m-average y/y)

Source: US Census, USTR, NBP calculations.

Share of US exports to Canada and Mexico (% of total exports from US) and share of

imports from Canada nad Mexico to US

(% of total US imports) in 2019

Duties imposed by US on China*

Value of additional Chinese imports from the United States according to

the first stage of agreement (mld USD)

0

5

10

15

0

2

4

6

Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19

Value of duties imposed by US (bn USD, LHS)

Share of duties value in the value of Chinese export to US (%, RHS)

*) Duties imposed from July 2018 (the beginning of „trade war”