1 |

For living and for renting

Top macro theme(s):

Two-digit property price rise (p. 2): Due to strong demand and moderately growing housing supply amid rising construction costs, the upward trend in housing prices continues.

Busy May (p. 4): Industrial output grew by 7.7% y/y in May, although the underlying trend weakened. Export oriented sectors remain the leaders of growth.

What else caught our eye:

State budget recorded a deficit of PLN 2.2bn after May (vs. PLN 0.08bn after Apr.), despite the payment of the 13

th pension (app. PLN 10bn), with

a sizeable increase in budget incomes (13.3% y/y vs. 8.1% y/y in Apr.).

Labour market data for May confirmed its support for both consumer sentiment, that hit record-highs in June, and for consumption expenditures. The wage bill increased by 10.4% y/y, mostly on a visible acceleration of average earnings (7.7% y/y), at a somewhat lower growth rate of employment (2.7% y/y).

The week ahead:

Construction output most likely continued expansion in May (PKOe: 14.2% y/y) while real retail sales growth stayed relatively “subdued” (PKOe: 6.9% y/y, despite a massive fiscal stimulus kicking off). It might reflect the effects of the Sunday trade ban, which redirected consumer demand to online channels and changed consumer habits (more consumption of services).

M3 money supply expanded on a two-digit rate in May (PKOe: 10.1% y/y) likely accompanied by robust household deposits growth (due to fiscal transfers).

Unemployment rate most likely dropped in May (to 5.4% on estimates of MinLab) indicating that the downward trend barely changed (-0.7pp y/y).

Flash CPI inflation will likely decelerate in June due to 1) high base, and 2) falling prices of fuels. We expect core inflation to continue its moderate acceleration, due to both supply, as well as demand pressure.

Number of the week:

9.6 pts – highest ever current consumer sentiment in Poland, in June (the leading indicator also hit a record-high level of 7.5 pts.).

21 June 2019

Chief Economist

Piotr Bujak piotr.bujak@pkobp.pl tel. +48 22 521 80 84

Macro Research Team

Marta Petka-Zagajewska Senior Economist marta.petka-zagajewska@pkobp.pl tel. +48 22 521 67 97

Marcin Czaplicki Economist marcin.czaplicki@pkobp.pl tel. +48 22 521 54 50

Urszula Krynska Economist urszula.krynska@pkobp.pl tel. +48 22 521 51 32

Michal Rot Economist michal.rot@pkobp.pl tel. +48 22 580 34 22

2018 2019†

Real GDP (%) 5.1 4.6

Industrial output (%) 5.8 6.8

Unemployment rate# (%) 5.8 5.2

CPI inflation** (%) 1.6 2.0

Core inflation** (%) 0.7 1.8

Money supply M3 (%) 9.2 8.0

C/A balance (% GDP) -0.7 -0.9

Fiscal balance (% GDP)* -0.4 -1.5

Public debt (% GDP)* 48.9 47.6

NBP reference rate# (%) 1.50 1.50

EURPLN‡# 4.30 4.35

Source: GUS, NBP, MinFin, †PKO BP Macro Research team forecasts;

‡PKO BP Market Strategy team forecasts; *ESA2010, **period averages; #end of

period.

Chart of the week: Housing prices in the CEE region

Source: Eurostat, PKO Bank Polski.

90

95

100

105

110

115

120

125

130

135

140

145

150

155

160

1q12 1q13 1q14 1q15 1q16 1q17 1q18

1q14=100Bulgaria

Czech Republic

Hungary

Poland

Romania

Slovakia

Poland Macro Weekly

Economic Research

2 |

Poland Macro Weekly 21 Jun 19

Two-digit property price rise

Due to strong demand and moderately growing housing supply amid rising construction costs, the upward trend in housing prices continues, although at a moderate rate.

Investing in a flat for rent remains competitive against the simplest alternative investments, so the interest in buying apartments to let persists.

The increase in the number of dwellings under construction bodes well for a supply of new flats in the subsequent quarters, while the stabilisation of the number of building permits suggests a more prudent assessment of housing supply in the longer horizon.

In 1q19, the housing market activity was still high and an acceleration in

housing prices, especially on the secondary market, was observed. The price

increase resulted from persistently high demand amid moderately growing

housing supply and rising construction costs (see also the full report available in

Polish: Housing market in 1q19 prepared by the PKO Sectoral Research Team and

compare Poland Macro Weekly (Mar 15, 2019) Real estate boom goes on).

The annual dynamics of transaction prices (CBN) in the 7 largest

agglomerations was within a range of 7-12% y/y (vs. 7-8% y/y in 4q18). The

NBP hedonic index for the 7 largest cities (in total) in 1q19 indicates continuation

of price growth on the secondary market. The hedonic index illustrates changes in

housing prices with similar characteristics and quality. Prices grew in most

provincial cities (in 12 out of 16).

In 1q19, on the primary market in Warsaw, the transaction price of the flat was

approx. 7% lower than the offer price. In other agglomerations the spread between

the transaction and offer price was equal to approx. 4%. In Warsaw, this may be

a signal of a slight strengthening of the position of buyers, in other provincial

cities, the negotiating space is still small.

The lending activity remained stable. According to the Polish Bank Association in

1q19, the value of newly granted housing loans (PLN 13.6 billion) was similar to

the previous quarter and higher than in 1q18 (+ 5.3% y/y). The average loan value

in 1q19 increased to PLN 268.2 thousand.

According to the NBP, recently in the 7 largest cities about 65%-70% of total

purchases on the primary market were paid in cash.

An interest in buying apartments to let persists. Investing in a flat for rent

remains competitive against the simplest alternative investments, such as deposits

or treasury bonds.

According to the REAS JLL Residential Advisory that monitors residential markets

in 6 agglomerations with the highest turnover in the primary market, in 1q19 16.5

thousand sales transactions were concluded (-10.3% y/y) and 16.9 thousand

units were put up for sale (+13.6% y/y). The number of apartments on offer was

equal to 51.1 thousand premises (+ 0.6% q/q, + 14.3% y/y). In total, in the last

four quarters, more flats have been put up for sale than sold. This is the effect of a

large number of housing starts in recent years and, at the same time, slower

purchases, limited by the high price of apartments.

According to the StatOffice, the number of dwellings completed in 1q19 increased

to 47.4 thousand in total (including 28.6 thousand flats (+12.1% y/y) built by real

Price index of sq.m. in largest cities

Source: GUS, PKO Bank Polski.

House prices in Poland (secondary

market)

Source: NBP, PKO Bank Polski.

House prices dynamics in Poland

(secondary market)

Source: NBP, PKO Bank Polski.

The profitability of renting a flat

Source: NBP (Financial Stability Report, June 2019), PKO Bank Polski.

Market segment 2q18 3q18 4q18 1q19

7 largest cities*

primary, offer prices 7.2 9.1 6.9 8.7

primary, transactional prices 0.3 5.6 7.0 6.9

secondary, offer prices 11.9 12.4 13.8 12.0

secondary, transactional prices 7.5 8.9 8.4 11.9

Poland^

total, transactional prices 6.2 6.5 7.6 --

Source:*offer (PONT), transactional (CBN)

^ EUROSTAT, GUS

80

85

90

95

100

105

110

1q08 1q09 1q10 1q11 1q12 1q13 1q14 1q15 1q16 1q17 1q18 1q19

Index of the sq. m. price (7 cities)

Hedonic index of the sq. m. price(7 cities)

3q 07=100

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

1q09 1q10 1q11 1q12 1q13 1q14 1q15 1q16 1q17 1q18 1q19

%, y/y

Index of the sq. m. price (7 cities)

Hedonic index of the sq. m. price (7 cities)

-2

-1

0

1

2

3

4

5

6

Sep-06 Sep-09 Sep-12 Sep-15 Sep-18

Rent to HH deposits

Rent to HH mortgage loan

Rent to 10Y bonds

pp.

3 |

Poland Macro Weekly 21 Jun 19

estate developers). Number of housing starts continued to grow (+12.3% y/y),

while the number of building permits declined in 1q19 by 14.3% y/y.

The overall housing climate indicator (the difference in the number of apartments

launched and commissioned in the last four quarters, i.e. housing projects in

progress) was still on an upward trend in 1q19. An increase in the number of

dwellings under construction bodes well for a supply of new flats in the

subsequent quarters, while the stabilisation of the number of building permits

suggests a more prudent assessment of housing supply in the longer horizon (3-4

years).

The big developers’ (with more than 49 employees) income statements at the end

of 1q19 suggest that the developers are limiting housing supply, that could let

them keep housing prices high and limit the market risk. This is indicated by:

(1) a slight decrease in the volume of funds for projects in progress in the last

three quarters; (2) lower volume (-39% y/y) of clients’ prepayments; (3) an

increased stock (+ 29% y/y) of ready-built apartments for sale in 1Q19;

(4) smaller (-57% y/y) land bank .

In 1q19 we saw a strengthening of the upward trend of construction costs of the

housing structures which has been observed over the last 2 years. According to

the StatOffice, costs (excluding land costs) increased by almost 5% y/y. According

to the cost estimates of SEKOCENBUD, the construction costs (excluding land

costs) of selected housing facilities increased by 9.0% -12.4% y/y (depending on

the kind of facility).

The underlying upward trend of housing prices should barely change in the

coming year, as: (1) demand is supported by low interest rates; (2) construction

costs are rising (due to labour and building material shortages and slow

improvement in access to new plots); (3) a supply of flats keeps increasing

moderately.

One cannot exclude (probability of about 30%) a slowdown in housing prices if:

(1) the demand for flats declines due to high prices; (2) population growth is

slower and consumer sentiment deteriorates; (3) the profitability of flat rental

decreases (due to the large supply of these apartments).

Changes in cost - estimates for

selected building types

Source: Source: SEKOCENBUD, PKO Bank Polski, *SFB-single-family building, ^MFB-multi-family building.

Housing affordability indicator*

Source: NBP, GUS, PKO Bank Polski.* ratio of an average monthly

salary to an average price of 1 square meter of flat (i.e. how many

sq. meters a person can buy for a monthly salary)

Key factors influencing property prices in a year’s time

Source: NBP, PKO Bank Polski.

12.1 12.4

10.211.0 11.3

9.0

0

2

4

6

8

10

12

14 %; r/r

2q18 3q18 4q18 1q19

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1q081q091q101q111q121q131q141q151q161q171q181q19

Warsaw Cracow Wroclaw

Gdansk Poznan Katowice

Lodz

FactorsImpact on prices

within a year

Macroeconomic environment

- interest rates

- economic growth

- labour market Regulatory environment

- cost od credit

- amended land regulations Housing market

- housing demand

- housing supply

4 |

Poland Macro Weekly 21 Jun 19

Busy May

Industrial output grew by 7.7% y/y in May, although the underlying trend weakened. Export oriented sectors remain the leaders of growth.

PPI inflation declined on base effects, but the underlying inflation pressure remains weak as well.

Industrial output grew by 7.7% y/y in May (PKOe: 8.9% y/y; consensus:

7.7% y/y; 9.2% y/y in April). The underlying trend weakened towards app.

6% y/y.

Sectors with high exposition towards foreign markets are still the leaders of

growth. The output of other transport equipment grew by 36.9% y/y in May, while

manufacturing of electrical equipment, motor vehicles and manufacturing of

rubber and plastic products continued growing by at least 10%. Positive signs

from the automotive market in Europe (the first rise for nine months in new car

registrations in May) suggests a more favourable environment for the Polish

automotive sector for the months to come.

High activity on the housing market and in the construction sectors stimulates

the output of investment goods (12% y/y in May). For the last 3-4 months

sectors such as manufacturing of other non-metallic mineral products and

manufacturing of metal products have been growing strongly. Meanwhile an

another record high reading of consumer sentiment for June, and the approaching

rise in private spending (due to fiscal stimulus which has already started with the

13th

pension payments and which will continue in autumn with “wider” 500+

benefit) are stimulating the production of durable (4.6% y/y) and nondurable

(4.8% y/y) consumer goods.

The (so far) favourable results of export oriented sectors in 2q (confirmed by

strong export growth in April) suggest, that in 2q the total export results and the

net export contribution to the GDP growth might surprise positively. Our

cautiously optimistic view on the industrial sector is supported by the recent

rebound in (flash) manufacturing PMIs for June in Germany and in France.

PPI inflation slowed down to 1.4% y/y in May (from 2.6% y/y in April), mainly

due to the high base effects and the decline in coal prices. The base effect is also

the main source of the fall in core PPI inflation (manufacturing excl. refined oil and

coke production) to 0.9% y/y from 1.4% y/y.

The prints are neutral for the MPC. Despite a series of hawkish statements from

some MPC members, we expect that rates will remain stable at least until the

end of 2020. The dovish stance of main central banks in the world, as well as fears

of the condition of the global economy will likely push the speculations over rate

hikes to the sphere of hypothetical considerations. The hawkish sentiment will also

be cooled down by the data from the real economy for June that will be burdened

by negative calendar effect, and will draw a less positive picture of the economy

(as shown today by June’s fall of the sentiment in industry, reported by the

StatOffice).

Real economy - trends

Source: NBP, Datastream, PKO Bank Polski.

Core PPI inflation* vs. core HICP

inflation

Source: GUS, Eurostat, PKO Bank Polski. * Manufacturing excl. refined oil and coke production.

-21-18-15-12-9-6-30369121518212427

-3

-1

1

3

5

7

9

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Industry (L)

Retail sales (in real terms, L)

Construction (R)

% y/y, 4mmed % y/y, 4mmed

-2

-1

0

1

2

-8

-6

-4

-2

0

2

4

6

8

Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18

Core PPI* (6m ago, L)

Core HICP (excl. services, R)

% y/y % y/y

5 |

Poland Macro Weekly 21 Jun 19

Weekly economic calendar

Indicator Time (UK) Previous Consensus* PKO BP Comment

Monday, 24 June

GER: Ifo Business Climate Index (Jun) 9:00 97.9 pts. 97.5 pts. -- --

POL: Construction output (May) 9:00 17.4% y/y 15.4% y/y 14.2% y/y Construction output most likely continued expansion in May while real retail sales growth stayed relatively “subdued” (despite a massive fiscal stimulus kicking off). It might reflect the effects of the Sunday trade ban, which redirected consumer demand to online channels and changed consumer habits (more consumption of services).

POL: Retail sales (May) 9:00 11.9% y/y 7.2% y/y 6.9% y/y

Tuesday, 25 June

POL: Money Supply M3 (May) 13:00 10.4% y/y 10.1% y/y 10.1% y/y

M3 money supply expanded in May on a two-digit rate likely accompanied by robust household deposits growth (fiscal transfers).

HUN: MNB meeting (Jun) 13:00 0.90% 0.90% -- --

USA: New home sales (May) 15:00 673k 685k -- --

USA: Consumer confidence (Jun) 15:00 134.1 pts. 132 pts. -- --

Wednesday, 26 June

POL: Unemployment Rate (May) 9:00 5.6% 5.4% 5.4%

Unemployment rate most likely dropped in May indicating that the downward trend barely changed (-0.7pp y/y).

CZ: Central bank meeting (Jun) 12:00 2.00% 2.00% -- --

USA: Durable goods orders (May, flash) 13:30 -2.1% m/m 0.0% m/m -- --

USA: Trade Balance (May) 13:30 -72.1 bn USD -71.7 bn USD -- --

Thursday, 27 June

EUR: Economic Sentiment Indicator (Jun) 10:00 105.1 pts. 104.9 pts. -- --

EUR: Consumer Confidence (Jun, final) 10:00 -7.2 pts. -- -- --

GER: CPI inflation (Jun, flash) 13:00 1.4% y/y 1.6% y/y -- --

GER: HICP inflation (Jun, flash) 13:00 1.3% y/y 1.5% y/y -- --

USA: GDP growth (1q) 13:30 3.1%q/q saar 3.2%q/q saar -- --

USA: Personal consumption (1q) 13:30 1.3%q/q saar 1.4%q/q saar -- --

USA: Initial Jobless Claims (Jun) 13:30 216k -- -- --

Friday, 28 June

POL: CPI inflation (Jun, flash) 9:00 2.4% y/y 2.4% y/y --

Flash CPI inflation will likely decelerate in June due to 1) high base, and 2) falling prices of fuels. We expect core inflation to continue its moderate acceleration, due to both supply, as well as demand pressure.

UK: GDP growth (1q) 9:30 1.8% y/y 1.8% y/y -- --

EUR: Core inflation (Jun) 10:00 0.8% y/y 0.8% y/y -- --

EUR: CPI inflation (Jun) 10:00 1.2% y/y 1.3% y/y -- --

USA: Personal Income (May) 13:30 0.5% m/m 0.3% m/m -- --

USA: Personal spending (May) 13:30 0.3% m/m 0.4% m/m -- --

USA: Core PCE inflation (May) 13:30 1.6% y/y 1.6% y/y -- --

USA: University of Michigan sentiment (Jun, final)

15:00 97.9 pts. 97.1 pts. -- --

Source: GUS, NBP, Parkiet, PAP, Bloomberg, Reuters, PKO Bank Polski. Parkiet for Poland, Bloomberg, Reuters for others.

6 |

Poland Macro Weekly 21 Jun 19

Selected economic indicators and forecasts Mar 19 Apr 19 May 19 2q18 3q18 4q18 1q19 2017 2018 2019

Economic activity

Real GDP (% y/y) x x x 5.3 5.2 4.9 4.7 4.9 5.1 4.6

Domestic demand (% y/y) x x x 4.9 6.1 4.8 4.2 4.9 5.5 4.9

Private consumption (% y/y) x x x 4.8 4.4 4.2 3.9 4.5 4.5 4.6

Gross fixed capital formation (% y/y) x x x 6.0 11.3 8.2 12.6 4.0 8.7 8.7

Domestic final sales (% y/y)* x x x 4.5 5.3 5.3 5.4 4.5 5.0 4.6

Inventories (pp) x x x 0.1 0.4 -0.3 -1.1 0.8 0.4 0.2

Net exports (pp) x x x 0.6 -0.6 0.3 0.7 0.3 -0.2 -0.1

Industrial output (% y/y) 5.6 9.2 7.7 7.0 5.3 5.5 6.1 6.5 5.8 6.8

Construction output (% y/y) 10.8 17.4 14.2 21.1 18.4 17.2 9.4 12.1 17.9 x

Retail sales (real, % y/y) 1.8 11.9 6.9 5.5 5.6 5.8 4.1 7.3 6.2 x

Nominal GDP (PLN bn) x x x 507.6 525.2 595.8 520.2 1989 2116 2247

Labour market

Registered unemployment rate‡(%) 5.9 5.6 5.4 5.9 5.7 5.8 5.9 6.6 5.8 5.2 Employment in enterprises (% y/y) 3.0 2.9 2.7 3.7 3.4 3.0 3.1 4.5 3.5 2.7

Wages in enterprises (% y/y) 5.7 7.1 7.7 7.5 6.9 7.0 6.9 5.9 7.1 6.1

Prices^

CPI inflation (% y/y) 1.7 2.2 2.4 1.7 2.0 1.4 1.2 2.0 1.6 2.0

Core inflation (% y/y) 1.4 1.7 1.7 0.6 0.7 0.7 1.1 0.7 0.7 1.8

15% trimmed mean (% y/y) 1.7 2.0 2.2 1.6 1.7 1.5 1.5 1.6 1.5 x

PPI inflation (% y/y) 2.5 2.6 1.4 2.5 3.2 2.7 2.5 2.9 2.2 1.7

Monetary aggregates‡

Money supply, M3 (PLN bn) 1457.2 1467.1 1467.1 1352.5 1376.2 1446.1 1457.2 1324.4 1446.1 1561.8

Money supply, M3 (% y/y) 9.9 10.4 10.1 7.3 7.9 9.2 9.9 4.6 9.2 8.0

Real money supply, M3 (% y/y) 8.2 8.2 7.5 5.4 6.0 8.1 8.2 2.5 8.1 5.2

Loans, total (PLN bn) 1283.0 1283.2 x 1223.5 1246.7 1259.7 1283.0 1172.4 1259.7 1355.5

Loans, total (% y/y) 7.8 7.4 x 5.8 6.5 7.5 7.8 3.7 7.5 7.6

Deposits, total (PLN bn) 1335.5 1350.5 x 1254.8 1263.2 1299.9 1335.5 1194.6 1299.9 1389.8

Deposits, total (% y/y) 8.2 9.8 x 6.5 6.6 8.8 8.2 4.6 8.8 6.9

Balance of payments

Current account balance (% GDP) -0.4 -0.2 -0.6 -0.1 -0.6 -0.7 -0.4 0.2 -0.7 -0.9 Trade balance (%GDP) -0.7 -0.7 -0.9 -0.5 -0.8 -1.0 -0.7 0.3 -1.0 -1.2 FDI (% GDP) 2.0 1.9 1.7 2.2 2.7 1.8 2.0 1.2 1.8 2.0

Fiscal policy

Fiscal balance(% GDP) x x x x x x x -1.5 -0.4 -1.5 Public debt (% GDP) x x x x x x x 50.6 48.9 47.6

Monetary policy‡

NBP reference rate (%) 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50

NBP lombard rate (%) 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50

NBP deposit rate (%) 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50

WIBOR 3Mx (%) 1.72 1.72 1.72 1.70 1.72 1.72 1.72 1.72 1.72 1.72

Real WIBOR 3Mx (%)# 0.02 -0.48 -0.58 -0.20 -0.18 0.63 0.63 -0.28 0.63 -1.05

Exchange ratesx‡

EUR-PLN 4.30 4.29 4.29 4.36 4.33 4.30 4.30 4.17 4.30 4.35

USD-PLN 3.79 3.83 3.85 3.74 3.82 3.76 3.79 3.48 3.76 3.92

CHF-PLN 3.84 3.76 3.83 3.77 3.80 3.81 3.84 3.57 3.81 3.95

EUR-USD 1.12 1.12 1.11 1.17 1.13 1.15 1.12 1.19 1.15 1.11

Source: GUS, NBP, PKO Bank Polski. x PKO BP Market Strategy team forecasts,

*domestic demand excl. inventories, ^period averages for quarterly and yearly data,

#deflated with current CPI inflation,

‡period end values.

7 |

Poland Macro Weekly 21 Jun 19

Monetary policy monitor

MPC Members Hawk-o-meter* Recent policy indicative comments

K. Zubelewicz 4.6 “The MPC has gone from a 'wait and see' stance during deflation to 'wait and sleep' amid today's negative real interest rates (…) In other words, cautiousness not to hike interest rates too soon and opposition against a rate cut are the dominating stance in the Council. At inflation above 2.5% in projection’s horizon or the risk of its acceleration within 18-24 months, you can think about a rate hike (…) The likelihood of a rate hike is low.” (27.11.2018, PAP).

E. Gatnar 4.6 “If core inflation keeps rising and exceeds the inflation target, it will definitely be an argument for an

interest rate hike (…) Most MPC members are sensitive to a rise in inflation which will soon hit the policy

target, something that has happened only once to date (…) Prior to this there were no serious inflationary

drivers and inflation didn't rise into the upper end of the deviation band. This is now ahead of us (…)The MPC

has to put greater attention to the shortcomings of the CPI indicator (…) I personally will include a 'correction'

to CPI when making my decisions.” (17.06.2019, PAP).

L. Hardt 3.8 "The appearance of a strong fiscal impulse in the policy mix doesn't fundamentally modify the stable rates

scenario for 2019 (…) I prefer to look at the impact of the fiscal stimulus on inflation rather than act pre-

emptively (…) In my opinion, in Poland's conditions, amid slowing economic growth it's better to fight off

slowdown with a fiscal impulse than by a more risky monetary impulse, that is an interest rate cut."

(25.02.2019, PAP).

J. Osiatynski 2.9 "In this year, I suppose, there will be no rate hikes. Another question is, if these hikes are needed.

Regarding next year, this is of course the decision of the entire council, but I fear that conditions in which

the rates should be raised will emerge, and sooner rather than later (…) Inflation will accelerate, but it will

remain within the inflation target (…) A factor to be watched out for is to what extent inflation is generated by

domestic demand, which is higher than the output potential, and to what extent it is generated by external

factors such as global food prices, or crude or fuel prices (…)It is important whether there will be a second

round effect, whether the increase [in prices] will be transferred onto inflation expectations” (14.06.2019, PAP).

R. Sura 2.8 “The presentation of solutions constituting a fiscal impulse does not change my expectations concerning the

interest rate path. With a great dose of certainty it can be said that they [the rates] will remain unchanged

throughout 2019. In the entire 2020, in turn, rate stabilization is very probable, as I do not expect fiscal

stimulus to have an essential impact on inflation processes. In this respect, however, inflation projections from

July and November will be of key significance, as they will address a longer time perspective” (26.02.2019,

PAP).

J. Kropiwnicki 2.5 “Some of us had forecast that CPI this year, due to various factors including a rise in oil prices on world

markets, but also accelerating of wage demands in Poland, may lead inflation towards the higher part of the

range, so this {PKO: unexpectedly high flash CPI estimate for April: 2.2% y/y] is not a situation when I would

be especially worried." (30.04.2019, Reuters).

G. Ancyparowicz 2.4 “If the situation is fairly stable, the MPC will continue the 'wait-and-see' policy; there are no reasons to change

that policy. (…) A rate hold to end-term has a more or less 95% probability and should be promoted outright

as it stabilizes inflationary expectations and reduces the scope of uncertainty. (…) Only some dramatic

situation could force the Council to act, possible excessive lending growth or inflation fuelled by irresponsible

wage policy, meaning chiefly public sector raises.” (25.05.2019, PAP). A. Glapinski 1.8 “The credit rises at an appropriate pace. Interest rates are not expected to change (…) I dare to say that I do

not see rates changed until the end of my term” (14.03.2019, PAP)

J. Zyzynski 1.3 “Al long as it [PKO: inflation rate] is within the inflation target this is not a problem for us, and there is no need to change rates. We are focusing on the money market.” (30.04.2019, Reuters).

E. Lon 1.1 “I continue to claim that interest rate stability is desirable, but a certain deterioration of sentiment in the euro

zone could negatively impact the outlook and profitability of our exports. As a result, the need to consider the

need to cut rates or introduce non-standard instruments could arise faster than I had recently thought. I

would like here to very clearly stress that I allow for the possibility that both an interest rate cut and non-

standard instruments could be implemented.” (25.02.2019, PAP). *the higher the indicator the more hawkish views. Due to the fact that the new MPC has not voted yet on interest rates changes, the positioning has been made based positively on PAP survey conducted among economists at banks in Poland (scale 1-5).

†WIBOR 3M from the last fixing, FRA transactions based on WIBOR 3M for subsequent periods, ‡ in basis points, *PKO BP forecast of the NBP reference rate.

1M 2M 3M 4M 5M 6M 7M 8M 9M

Date 20-Jun 20-Jul 20-Aug 20-Sep 20-Oct 20-Nov 20-Dec 20-Jan 20-Feb 20-Mar

WIBOR 3M/FRA† 1.72 1.75 1.73 1.74 1.74 1.71 1.73 1.73 1.70 1.71

implied change (b. p.) 0.03 0.01 0.02 0.02 -0.01 0.01 0.01 -0.02 -0.01

MPC Meeting 5-Jun 3-Jul - 11-Sep 2-Oct 6-Nov 4-Dec ~8-Jan ~5-Feb ~4-Mar

PKO BP forecast* 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50

market pricing* 1.53 1.51 1.52 1.52 1.49 1.51 1.51 1.48 1.49

Interest rates – PKO BP forecasts vs. market expectations

8 |

Poland Macro Weekly 21 Jun 19

Poland macro chartbook

NBP policy rate: PKO BP forecast vs. market expectations Short-term PLN interest rates

Slope of the swap curve (spread 10Y-2Y)* PLN asset swap spread

Global commodity prices (in PLN) Selected CEE exchange rates against the EUR

Source: Datastream, NBP, PKO Bank Polski. *for PLN, and EUR 6M, for USD 3M.

1.25

1.50

1.75

2.00

Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20

market expectations (FRA)

PKO forecast

%

now

3 months ago

1.66

1.70

1.74

1.78

1.82

1.86

1.90

1.94

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

WIBOR 3M

FRA 6X9

FRA 9x12

%

0

20

40

60

80

100

120

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

PLN

USD

EUR

pb

-60

-40

-20

0

20

40

60

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

2Y 5Y 10Y

pb

-30

-10

10

30

50

70

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

GSCI agriculture

GSCI

GSCI oil

% y/y

98

99

100

101

102

103

104

105

106

107

108

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

PLN

CZK

HUF

RON

Index (1 Jan 2017=100)

9 |

Poland Macro Weekly 21 Jun 19

Economic sentiment indicators Poland ESI for industry and its components

Broad inflation measures CPI and core inflation measures

CPI inflation – NBP projections vs. actual Real GDP growth – NBP projections vs. actual

Source: Datastream, GUS, EC, NBP, PKO Bank Polski.

-4

-3

-2

-1

0

1

2

3

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

PMI

OECD CLI

Industry

Ifo (Germany)

Retail sales

st.dev. pts

-80

-70

-60

-50

-40

-30

-20

-10

0

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

ESI - Industry (L)

Employment (L)

Orders (P)

pts, sa

0

1

2

3

4

5

6

7

8

9

-4

-2

0

2

4

6

8

10

12

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

CPI

Core

PPI

Wages ( R)

% y/y % y/y

-2

-1

0

1

2

3

4

5

6

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

Range of core inflation messures

CPI

% y/y

-2

-1

0

1

2

3

4

1q14 1q15 1q16 1q17 1q18 1q19 1q20

Actual

July 2018

November 2018

March 2019

%, y/y

0

1

2

3

4

5

6

1q14 1q15 1q16 1q17 1q18 1q19 1q20 1q21

Actual

July 2018

November 2018

March 2019

%, y/y

10 |

Poland Macro Weekly 21 Jun 19

Economic activity indicators Merchandise trade (in EUR terms)

Central government revenues and expenditures* General government balance (ESA2010)

Unemployment rate Employment and wages in the enterprise sector

Source: NBP, Eurostat, GUS, MinFin, PKO Bank Polski. *break in series in 2010 due to methodological changes.

-30

-20

-10

0

10

20

30

-20

-15

-10

-5

0

5

10

15

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

Industry (L)

Retail sales (in real terms, L)

Construction ( R)

% y/y, 4mmed % y/y, 4mmed

-30

-20

-10

0

10

20

30

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

exports imports

% y/y, 4mmed

-20

-15

-10

-5

0

5

10

15

20

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

revenues

expenditures

% y/y, 4mmed

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

1q08 1q09 1q10 1q11 1q12 1q13 1q14 1q15 1q16 1q17 1q18

overall balance

primary balance

% GDP, 4quarter rolling

0

5

10

15

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

registered (NS)

harmonized (SA)

NAIRU (harmonized)

%

-5

0

5

10

15

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

real wage bill

wages (3MMA)

employment

% y/y

11 |

Poland Macro Weekly 21 Jun 19

Loans and deposits Non-performing loans (NPLs) – by sectors*

Current account balance Financial account balance

External imbalance measures NBP FX reserves (in EUR terms)

Source: NBP, PKO Bank Polski. *break in series in Jan2018 due to methodological changes.

0

5

10

15

20

25

30

35

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

deposits FX-adj

loans FX-adj

0

2

4

6

8

10

12

14

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

non-finacial sector

households

enterprises

-35

-25

-15

-5

5

15

25

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

goodsservicesprimary incomesecondary incomecurrent account

EUR bn

-20

-10

0

10

20

30

40

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

other investment and derivatives balanceFDI balanceportfolio investment balancefinancial account balance

EUR bn

-30

-20

-10

0

10

20

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

C/A

C/A+FDI

C/A+FDI+ERR

C/A+FDI+ERR+CAP

EUR bn

40

50

60

70

80

90

100

110

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

Tysi

ące EUR bn

12 |

Poland Macro Weekly 21 Jun 19

Previous issues of PKO Macro Weekly:

Strong exports growth despite global headwinds (Jun 14, 2019)

“Market is finally realistic” (Jun 7, 2019)

Growth firing on all cylinders (May 31, 2019)

Corporate investments boom (May 24, 2019)

The slowdown that wasn’t (May 17, 2019)

Underlying inflation returns after a long break (May 10, 2019)

Fiscal front-runner (Apr 26, 2019)

Fiscal surplus ahead? (Apr 19, 2019)

External debt on a downward path (Apr 12, 2019)

Business climate cooling down (Apr 5,2019)

Around economic cycles (Mar 29, 2019)

Resistance (Mar 22, 2019)

Real estate boom goes on (Mar 15, 2019)

Retailers facing new shopping habits (Mar 8, 2019)

Fiscal afterburner (Mar 1, 2019)

Consumption to drive GDP growth (Feb 22, 2019)

Inflation bottomed out? (Feb 15, 2018)

Should we really fear the hikes? (Feb 8, 2019)

27 years of uninterrupted economic expansion (Feb 1, 2019)

Credit boom ahead? (Jan 25, 2019)

Slowdown-resistant? (Jan 18, 2019)

2019: what’s in store for Poland? (Jan 11, 2019)

2018: flashbacks (Jan 4, 2019)

Growth resists headwinds (Dec 21, 2018)

Growing costs are biting the housing market (Dec 14, 2018)

Economist’s dream (Dec 7, 2018)

Less fizz in the economy (Nov 30, 2018)

Non-inflationary growth goes on (Nov 16, 2018)

Projections, forecasts, stress-tests (Nov 9, 2018)

Fiscal balance flirting with surplus (Oct 26, 2018)

Another soft patch ahead? (Oct 19, 2018)

At risk of electric shock (Oct 12, 2018)

Bumpy road to inflation target (Oct 5, 2018)

Fewer flats, higher prices (Oct 1, 2018)

Late cycle coming (Sep 21, 2018)

Still no imbalances at sight (Sep 14, 2018)

Investment rate in Poland - higher than it seems (Sep 7, 2018)

13 |

Poland Macro Weekly 21 Jun 19

Poland’s macro in a nutshell

2018 2019 Comment

Real economy The GDP growth in 1q19 was based on all three engines: investments, private consumption and net exports. Surprisingly strong revival of corporate investment at the start of the year (21.7% y/y), the upcoming EU absorption peak and the approaching stimulation of consumption by the upcoming fiscal package mean that although in 2q19 a slight economic slowdown is possible, the acceleration of domestic demand growth will boost GDP growth in the remainder of the year to similar levels as in 1q19. Thus we predict economic growth this year at 4.6%, keeping Poland in the forefront of the EU countries.

- real GDP (%) 5.1 4.6

Prices We forecast the increase in CPI inflation reflecting both a stronger rebound in core inflation as well as changes in the assumptions regarding exogenous factors (including a higher trajectory of oil prices). - CPI inflation (%) 1.6 2.0

Monetary aggregates Economic expansion supports demand for loans, and the supply of loans is less and less limited by capital needs and lower banks' profitability. - M3 money supply (%) 9.2 8.0

External balance A rapid increase in the share of goods from Poland in the import of consumer goods in Germany and the greater geographical diversification of customers are the source of exports resistance. Structural changes (including the inflow of investments in business services centers) will contribute to further growth of surplus in trade in services, which will allow maintaining a relatively balanced current account in the coming years.

- current account balance (% GDP) -0.7 -0.9

Fiscal policy The fiscal stance in 2018 was the best on record. The continued strong consumption growth (expansion of the tax base) and further improvement of tax collection keep the public finance sector deficit low, despite the significant increase in public investment and the expenditure related to the lowering of the retirement age. Accelerating registration/legalisation of migrants’ employment boosts revenues of social security funds. Additional fiscal stimulus can be funded in 2019 without significant impact on deficit.

- fiscal balance (% GDP) -0.4 -1.5

Monetary policy Although CPI inflation may temporarily exceed 3.5% in 1q20, our monetary policy assumptions remain unchanged: at least a dozen consecutive MPC meetings without changes in NBP rates are ahead of us. However, the balance of domestic risk factors for this forecast tilts more and more clearly towards rate hikes. On the other hand external factors are cumulating on the side of falling inflation and possible pressure to ease monetary policy.

- NBP reference rate (%) 1.50 1.50

Source: GUS, NBP, Eurostat, PKO Bank Polski, The above information has been prepared for informational purposes only and is provided to PKO BP SA Group clients. It is not an offer (as understood under the Civil Law of 23rd April 1964) to buy or sell or

the solicitation of an offer to buy or sell any financial instrument and does not constitute the provision of investment, legal or tax advice. It is also not intended to provide a sufficient basis on which to make an

investment decision. The above information has been obtained from or based upon sources believed to be reliable, but PKO BP SA Group does not warrant its completeness or accuracy. PKO Bank Polski Group

strongly recommends that clients independently evaluate particular investments and accepts no liability for the financial effect of its clients’ investment decisions.

The above information is prepared and/or communicated by Powszechna Kasa Oszczedności Bank Polski S.A., registered in the District Court for the Capital City of Warsaw, 13th Commercial Division of the

National Court Register under KRS number 0000026438, Tax Identification Number (NIP): 525-000-77-38, REGON: 016298263, share capital 1,250,000,000 PLN.