Macro: COVID and Economic Update Poland: Massive fiscal impulse keeps GDP slump in check

Coronavirus: Similar to other CE countries Poland was hit by the 2nd wave of COVID-19 already in September with most rapid increase throughout Oct and Nov. The government was determined to prevent another lockdown in the scale like in Q2, however increasing number of deaths and rapidly deteriorating capacity of the health system required several measures imposed in weekly intervals as situation worsened. The situation has begun to stabilize recently which allowed for plans of gradual easing of measures.
Growth outlook: While Poland was relatively less hit by the pandemic in Q2, its economy also recovered rapidly in Q3 with GDP decline narrowing from -8% yoy to -1.5% yoy in Q3. Obviously, the 2nd wave will result again in weaker dynamic in Q4 but as full lockdown seems to have been averted we expect the decline in GDP in the final quarter of 2020 to be much lower than in Q2. It is also important that this time the fall in activity will focus on the services sector while manufacturing (responsible for over 20% of value added) is much less affected. We are more cautious than consensus since we expect GDP growth at 3.6% yoy in 2021 after a decline of 3.2% in 2020. A significant boost to growth already in late 2021 but especially in 2022/23 may come in the form of EU funds (incl. additional NGEU). However, a risk factor here is the recent announcement from the Polish government regarding plans to block the approval process for the funds in response to linking their release to the rule of law.
Inflation and monetary policy: CPI has turned higher than expected in the last months partly due to pandemic related price hikes. In 2021 the base effect and demand side effects will dampen the indicator significantly; however, there will remain also several inflation drivers at play like regulatory price hikes which should keep CPI on average near the mid-target of 2.5% yoy. This will allow the MPC to keep rates unchanged likely even till the end-2022.
Fiscal policy: the sizeable fiscal stimulus which will result in a 2020 deficit between 9% and 10% of GDP. In response to recent restrictions the 6th edition of the anti-crisis shield is approved. For 2021 there will still be room for support as the stabilising expenditure rule has been eased while return to fiscal tightening is planned for 2022.