Brussels, June 2016

Marcin Kujawski, Economist Central & Eastern Europe

Poland: Economic outlook 2016-2020

Presentation outline

� Economic activity in H1 2016

� Growth pattern in the near-term

� Fiscal risks

� Rebound in inflation

� Monetary policy outlook

� Economic prospects until 2020

� BNP Paribas economic forecast

June 2016 2

June 2016

Poland: Activity

Source: Macrobond, GUS, BNP Paribas

� Economic growth disappointed in Q1 with the economy expanding by just 3% compared to previous

year.

� Recent monthly activity data remain rather lukewarm. Hence, we do not expect economic growth to

have accelerated during April-June.

� Construction sector is the weakest spot reflecting poor investment in the first half of the year.

Meanwhile, retail sales is faring well mirroring robust households’ spending.

Soft economic activity in H1 2016

3

June 2016

Poland: Uncertainty

Source: Macrobond, NBP, World Bank, Ifo, BNP Paribas

� Since last year’s general elections the concerns over the rule-of-law and political stability in general has

significantly increased in Poland.

� The row over the Constitutional Tribunal has triggered the launch of the European Commission’s rule-

of-law procedure.

� Worries about the politiical situation may weigh on the climate for foreign investors and consequently

affect the FDI inflows to Poland.

4

Uncertainty weighing heavily on the outlook

June 2016

Poland: Investment

Source: Macrobond, NBP, GUS, BNP Paribas

� Investment growth tumbled in Q1 as capital spending contracted by 1.5% compared to previous quarter

and almost 2% compared to Q1 2015.

� The switch to the new EU financial framework, which resulted in lower inflows of EU funds, seem to

have been the main culprit of dismal investment outlays in early 2016.

� Lower EU aid coupled by higher cost of credit, soft FDI inflow and higher uncertainty suggest

investment is unlikely to rebound anytime soon.

Investment set to slow down

5

June 2016

Poland: Households’ spending

Source: Macrobond, GUS, BNP Paribas

� We expect private consumption to remain the key growth driver in Poland in 2016.

� The upturn in the labour market point to rising households’ incomes in the months ahead.

� Separately, the new programme of increased children subsidies will bring an additional boost to

households’ spending from mid-2016.

Private consumption to be the key engine of growth this year

6

June 2016

Poland: Fiscal policy

Source: Macrobond, European Commission, Ministry of Finance, BNP Paribas

� The government substantially increased social spending through the children subsidy programme. The

annual cost of the allowance will total about PLN 22bn.

� Higher spending is expected to be financed via new levies on the banking sector and retail stores as

well as improved tax collection.

� In our view, the general government deficit is set to top 3% of GDP next year especially if the

government decides to lower the retirement age.

Fiscal balances look set to deteriorate

7

June 2016

Poland: Prices

Source: Macrobond, GUS, NBP, BNP Paribas

� Poland is facing deflation since mid-2014 - primarily as a result of cheap oil.

� Inflation is unlikely to rise substantially in the nearest term, but will be gradually accelerating from late

2016 on the back of stronger wage and demand pressures.

� We expect CPI readings rising to +0.5% y/y by the end of the year and see headline inflation

approaching the central bank’s 2.5% target in mid-2017.

Prices low for now…accelerating from H2 2016

8

June 2016

Poland: Monetary policy

Source: Macrobond, GUS, NBP, ECB, BNP Paribas

� The new MPC was expected to opt for looser monetary policy.

� The recent comments suggest however that the MPC supports a stable interest rates path.

� Against this backdrop, we expect rates in Poland to be kept on hold until the end of year.

� With inflation at the target in mid-2017, we see 50bp in rate hikes next year.

Rates to be kept on hold in 2016…hikes likely next year

9

June 2016

Poland: Cyclical position

Source: Macrobond, GUS, OECD, BNP Paribas

� For several years, the economy has followed a repetitive, cyclical pattern.

� Our model for forecasting Poland’s economic cycle comprises two domestic variables: GDP trend

growth (broadly stable) and an output gap proxy (GDP level vs trend-GDP level), lagged by about 1.5

years and entering the regression with a negative sign.

� The slowdown evident in the GDP data for Q1 2016 should continue until 2017, in our view, with growth

dipping below 3% both this year and next.

Cyclically set to slow down

10

June 2016

Poland: Potential employment & capital productivity

� Both employment growth and capital productivity suggest that potential GDP growth will be decelerating

in the years to come.

� Potential employment will be mainly hit by demographics. Polish society will be swiftly ageing in the

future.

� Some support to labour growth could come from higher activity.

� Still, to underpin potential GDP growth, the primary focus should be on technological progress.

Employment to decline in the years to come

11

Source: Macrobond, OECD, BNP Paribas

June 2016

Poland: R&D and FDI

Source: Macrobond, World Bank, NBP, European Commission, BNP Paribas

� Research & Development spending in Poland is amid the lowest in the European Union. Even in

Central Europe Poland is a laggard.

� R&D spending could increase the overall productivity of the economy and secure convergence further

down the line. Still, weaker FDI inflow could be a limit to this process.

� On a separate note, higher R&D spending could boost the value added of production and exports and

consequently Poland’s competitiveness.

R&D spending crucial for long-term growth

12

June 2016

Poland: Social spending

Source: Macrobond, GUS, NBP, ECB, BNP Paribas

� Poland’s population will be swiftly ageing in the years to come. The dependency ratio is expected to

rise to almost 30% in mid-2020s from 20% currently.

� Higher share of elderly people means a huge burden for the social security system.

� The decision to lower the retirement age could make matters even worse.

� We see a risk of a crowding-out effect in the general government sector with pension payments having

priority over capital spending.

Ageing population to be a huge burden for the budget

13

June 2016

Poland: EU funds

Source: Macrobond, Eurostat, BNP Paribas

� EU funds have been one of the key sources of Poland’s economic growth in the last few years.

� Under the new financial framework for 2014-20 Poland will get some EUR 10bn cohesion funds more

than under the current one.

� Therefore, EU aid should remain the primary engine of growth in the years to come.

� Still, efficient spending of the funds will be crucial to secure sustainable growth in the longer term.

EU funds increasingly important

14

Poland: Economic forecast

June 2016 15

13 14 15 16 (1)

17 (1)

Q1 (1)

Q2 (1)

Q3 (1)

Q4 (1)

Q1 (1)

Q2 (1)

Q3 (1)

Q4 (1)

Components of growth

GDP (% q/q) - - - - - -0.1 0.8 0.8 0.8 0.6 0.5 0.5 0.5

GDP 1.2 3.3 3.6 2.8 2.6 3.0 2.9 2.7 2.7 3.0 2.7 2.5 2.2

Private consumption 0.8 2.6 3.1 3.9 3.3 2.9 3.6 4.2 4.8 4.6 3.6 2.8 2.1

Public consumption 2.1 4.7 3.4 3.7 2.4 4.0 3.8 3.8 3.0 2.6 2.4 2.1 2.4

Fixed investment -0.4 10.1 6.8 0.9 4.6 1.8 0.7 0.3 0.6 3.0 5.0 5.4 4.8

Exports 6.1 6.4 6.6 4.1 5.3 4.4 5.5 5.0 1.6 5.2 5.0 5.3 5.8

Imports 1.7 10.0 6.0 5.0 6.4 5.1 6.0 6.7 2.1 6.2 6.4 6.3 6.9

Industrial production 2.3 3.4 4.8 2.7 3.2 2.8 3.1 2.9 2.1 3.0 3.2 3.3 3.3

13 14 15 16 (1)

17 (1)

Q1 (1)

Q2 (1)

Q3 (1)

Q4 (1)

Q1 (1)

Q2 (1)

Q3 (1)

Q4 (1)

Inflation & labour

CPI 0.9 0.0 -0.9 -0.5 2.0 -0.9 -0.9 -0.5 0.2 1.4 2.1 2.2 2.3

Core CPI 1.2 0.6 0.3 0.0 1.2 -0.1 -0.2 -0.1 0.3 0.6 1.2 1.5 1.6

Unemployment rate (%) 13.5 12.3 10.5 9.5 8.6 10.2 9.8 9.1 9.1 9.6 9.0 8.1 7.9

13 14 15 16 (1)

17 (1)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Fiscal variables

General govt. budget (PLN bn) -67 -57 -47 -52 -69 - - - - - - - -

General govt. budget (% of GDP) -4.0 -3.3 -2.6 -2.8 -3.6 - - - - - - - -

Primary budget (% of GDP) -1.5 -1.4 -0.8 -0.9 -1.6 - - - - - - - -

General govt. debt (% of GDP) 56.0 50.5 51.3 52.4 53.6 - - - - - - - -

13 14 15 16 (1)

17 (1)

Q1 (1)

Q2 (1)

Q3 (1)

Q4 (1)

Q1 (1)

Q2 (1)

Q3 (1)

Q4 (1)

Interest rates

Policy rate (%) 2.50 2.00 1.50 1.50 2.00 1.50 1.50 1.50 1.50 1.50 1.50 2.00 2.00

3-month rate (%) 2.71 2.06 1.70 1.20 2.20 1.67 1.60 1.60 1.60 1.60 1.80 2.20 2.20

FX rates (2)

EURPLN 4.15 4.30 4.26 4.35 4.30 4.26 4.35 4.35 4.35 4.30 4.30 4.30 4.30

13 14 15 16 (1)

17 (1)

18 (1)

19 (1)

20 (1)

21 (1)

22 (1)

23 (1)

24 (1)

25 (1)

GDP 1.2 3.3 3.6 2.8 2.6 2.8 2.7 2.6 2.5 2.4 2.3 2.2 2.1

CPI 0.9 0.0 -0.9 -0.5 2.0 2.0 1.8 1.6 1.6 1.9 2.1 2.1 2.3

Policy rate (%) 2.50 2.00 1.50 1.50 2.00 2.50 3.00 3.50 3.50 3.50 3.50 3.50 3.50

EURPLN (2)

4.15 4.30 4.26 4.35 4.30 4.25 4.20 4.15 4.10 4.10 4.10 4.10 4.10

Source: BNP Paribas

Year 2016 2017

Poland: Economic & Financial Forecasts

Year 2016 2017

Year 2016 2017

Long-term forecast

Footnotes: (1) forecast, (2) end period

Figures are year-on-year percentage changes unless otherwise indicated

Year 2016 2017

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February 2016

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