The two key drivers of the Polish economy were private consumption and public investments. The consumer boom, which reached 5% early in the year, was generated by a good labour market (historically low unemployment), fast growing incomes of households (in particular earned by employees), unwavering consumer confidence, relatively strong migration into Poland, an active real estate market, and a solid growth of consumer lending. Public investments were largely driven by the timeline of spending.
First of all, intensive contracting of EU funds in late 2016 and in 2017 produced its results in 2018 and made up for part of the earlier delay in spending. As a consequence, public investments stepped up considerably. The growth seems to have peaked at a 30% year-on-year increase.
Second, the local government election marked a change in the investment plans of local governments: their investment budgets doubled mid-year. In fact, local government investments accounted for a half of the increase in total investments year on year. In contrast, private investments remained relatively low in 2018. According to available statistics, investments of companies with private local capital and investments of small and mid-sized enterprises were disappointingly small. In our opinion, this was largely due to a margin squeeze caused by growing costs of labour and energy in combination with harsh competition which prevented a shift of higher costs to prices. Investment plans of companies were also curtailed by a shortage of human resources, which augmented throughout 2018.
Despite some projections, inflation decreased in 2018. The annual average price index was 1.6% year on year and only 1.1% year on year in December. The mild inflation trajectory in 2018 was a result of several factors. First, after a dynamic rise in 2017, the increase of food prices in 2018 slowed down throughout the year thanks to low prices of fruits (due to very favourable weather conditions) and in the absence of a continued increase in the prices of eggs and butter. Second, fuel prices initially boosted inflation but dropped by the year’s end. Third (and perhaps most important), the price index in other categories of goods and services was disappointing and core inflation was 0.5-1%. The dynamic growth of salaries did not affect inflation, even with regard to work-intensive services. The price index in these categories remained relatively low. As a result, inflation in Poland was low, both in relation to the current phase of the cycle and in comparison to other economies of the region.
The low inflation could be explained by a number of factors: a relatively large and competitive local market, technological advancements, a surplus of margins dating back to the period of low salary raises, a stable currency. Rising electricity prices (up by several dozen percent on energy exchanges) alerted both consumers and corporates in late 2018. The rise hardly affected the prices of goods and services, and a regulatory freeze on electricity prices suggests that it will remain so in 2019, as well.