Economic Institute

Inflation and economic growth projection of Narodowy Bank Polski based on the NECMOD model Warsaw / 14 November 2016

Inflation projection of the NBP based on the NECMOD model

Outline Outline:

Changes between rounds Projection 2016 – 2018 -

External environment

-

Consumption demand

-

Investment demand

-

Foreign trade

-

Inflation

Uncertainty

1

Changes between projection rounds

2

Projection 2016 - 2018

3

Uncertainty

2

Inflation projection of the NBP based on the NECMOD model

Outline:

Changes between rounds Projection 2016 – 2018 -

External environment

-

Consumption demand

-

Investment demand

-

Foreign trade

-

Inflation

Uncertainty

Changes between projection rounds

3

Inflation projection of the NBP based on the NECMOD model

4

November GDP projection compared to July projection GDP in 2016: Private consumption Gross capital formation GDP

Public consumption Net exports



0.6

0.6

0.4

0.4

0.2

0.2

0

GDP in 16q2 lower than expected: 

New data on the use of funds from the 2014-2020 financial perspective, indicate a lower than expected influx of capital transfers



Timing of payments from programme „Family 500 plus” (more than half of the payments in 16q2 completed in June this year)



Exports – higher car consumption

0

-0.2

-0.2

-0.4

-0.4

-0.6

-0.6

-0.8

-0.8

GDP y/y, % 2016

Source: GUS data, NBP calculations

2017

2018

2016

2017

2018

July 2016

3.2

3.5

3.3

November 2016

3.0

3.6

3.3

Inflation projection of the NBP based on the NECMOD model

5

November CPI projection compared to July projection

Core inflation

Food prices

Energy prices

CPI inflation

0.2

0.2



Lower demand pressure

0.15

0.15



The slower growth in import prices and stronger exchange rate

0.1

0.1



Unchanged VAT rates in 2017

0.05

0.05



Higher energy prices on global markets

0

0

-0.05

-0.05

-0.1

-0.1

-0.15

-0.15

-0.2

-0.2 2016

Source: GUS data, NBP calculations

2017

2018

CPI y/y, %

2016

2017

2018

July 2016

-0.5

1.3

1.5

November 2016

-0.6

1.3

1.5

Inflation projection of the NBP based on the NECMOD model

6

Changes between projections

CPI inflation y/y, %

GDP y/y, % y/y, %

90%

60%

30%

Jul 16

y/y, %

Nov 16

90%

60%

30%

Jul 16

Nov 16

inflation target

8

8

5

5

7

7

4

4

6

6

3

3

5

5

2

2

4

4

1

1

3

3 0

0

2

2

1

1

-1

-1

0

0

-2

-2

-1 13q1

14q1

Source: GUS data, NBP calculations

15q1

16q1

17q1

18q1

-1 18q4

-3 13q1

14q1

15q1

16q1

17q1

18q1

-3 18q4

Inflation projection of the NBP based on the NECMOD model

Outline:

Changes between rounds Projection 2016 – 2018 -

External environment

-

Consumption demand

-

Investment demand

-

Foreign trade

-

Inflation

Uncertainty

Projection 2016-2018 

Economic conditions abroad



Consumption demand



Investment



International trade



Inflation

7

Inflation projection of the NBP based on the NECMOD model

8

GDP growth in the second half of 2016 remains at a relatively low level

16q2

16q3

GDP (y/y) (%)

3.1

(3.4)

2.9

(3.3)

Domestic demand (y/y) (%)

2.4

(4.0)

2.8

(3.2)

Private consumption (y/y) (%)

3.3

(3.8)

4.0

(4.2)

Public consumption (y/y) (%)

4.4

(3.8)

4.3

(4.8)

Industrial and constr. production y/y

Retail sales y/y

Real wage fund y/y

GDP y/y (right scale)

12

12

8 8 4 4

Gross fixed capital form. (y/y) (%)

-4.9

(0.9)

-4.9

(0.9)

Exports (y/y) (%)

10.9

(7.2)

7.3

(7.4)

0

0 -4

Imports (y/y) (%)

9.9

(8.6)

7.3

(7.3)

Net exports contribution (pp.)

0.8

(-0.5)

0.1

(0.1)

-8 09q1

Values from the July projection are given in brackets (seasonally adjusted). Indicators with values higher than in the July projection are marked green, whereas indicators with lower values are marked red. Source: GUS data, NBP calculations

10q1

11q1

12q1

13q1

14q1

* Estimates of NBP IE based on monthly indicators for VII-VIII/16

15q1

-4 16q3*

Inflation projection of the NBP based on the NECMOD model

9

In 2017-2018 GDP growth will accelerate

Consumption Change in inventories GDP

Gross fixed capital formation Net exports

5

5

4

4

3

3

2

2

1

1

0

0

-1

-1

-2

15q1

16q1

17q1

18q1

18q4



The slight downturn in the global economy



Private consumption the main driver of GDP growth supported by a rise in family benefits and good labour market conditions



From 2017 r. positive gross fixed capital formation dynamics – gradual acceleration of the absorption of funds under the 2014-2020 financial framework



Negative net exports – unfavourable outlook for world trade and the appreciation trend of the zloty

-2 y/y, % GDP

Source: GUS data, NBP calculations

2015

2016

2017

2018

3.6

3.0

3.6

3.3

Inflation projection of the NBP based on the NECMOD model

Outline:

Changes between rounds Projection 2016 – 2018 -

External environment

-

Consumption demand

-

Investment demand

-

Foreign trade

-

Inflation

Uncertainty

Economic conditions abroad

10

Inflation projection of the NBP based on the NECMOD model

11

Slightly negative influence of economic conditions abroad on the Polish economy

y/y, %

Euro area

Germany

United States

United Kingdom

6

6

4

4

2

2

0

0

-2

-2

-4

-4



Unfavourable outlook for global trade



Slight slowdown of European economies due to, among others, outcome of the referendum in the UK



Favourable consumption conditions in the Eurozone and United States

 The normalization of the economic situation in the BRIC countries.

GDP y/y, % -6

2015

2016

2017

2018

-6

Euro area

1.9 (1.6)

1.6 (1.5)

1.4 (1.2)

1.4 (1.3)

-8 -8 09q1 10q1 11q1 12q1 13q1 14q1 15q1 16q1 17q1 18q1 18q4

Germany

1.5 (1.4)

1.8 (1.5)

1.5 (1.3)

1.3 (1.3)

United States

2.6 (2.4)

1.5 (1.7)

2.1 (2.1)

2.0 (2.2)

United Kingdom

2.2 (2.3)

1.9 (1.7)

1.2 (1.7)

1.5 (1.8)

Source: dane Bloomberg, Eurostat, obliczenia NBP

July 2016 projection data are given in brackets

Inflation projection of the NBP based on the NECMOD model

12

Revision of world economic growth forecasts Revision of IMF forecast of GDP growth: September 2016 vs April 2016 (p.p.)

September IMF forecast of GDP real growth (%) 10 0.2

8 6

0.1

4

0.0

2

-0.1

0

-0.2

-2

-0.3

-4 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 World

Developed economies

-0.4 World

Developed economies

Emerging economies 2016

Source: IMF, World Economic Outlook, September 2016

Emerging economies

2017

Source: IMF, IE.

In comparison with forecast from April 2016, in WEO from September 2016 IMF expected slightly lower global economic growth in 2016 and 2017, which was affected by lower forecasts of growth in developed economies.

Inflation projection of the NBP based on the NECMOD model

13

The normalization of the economic situation in the BRIC countries

Revision of IMF forecasts for GDP growth in BRIC countries : September 2016 vs April 2016 (p.p.) 1

Forecasts of GDP growth (% y/y) in BRIC countries 6

Brazil Russia

4

0.8

2

0.6

0

Brazil forecast Russia forecast

China forecast India forecast

8 7

-2

0.4

China India

9

6

-4 0.2

5

-6

0 Brazil

Russia 2016

Source: IMF, IE.

India 2017

China

4

-8

I II III IV I II III IV I II III IV I II III IV I II III IV I 2013

2014

2015

2016

2017

I II III IV I II III IV I II III IV I II III IV I II III IV I

2018

2013

2014

2015

Source: Bloomberg.

Economic outlook for Brazil and Russia improved, however in both countries economic recovery will be probably weak. In India continuation of recovery is expected, in China – further, moderate slowdown in GDP growth.

2016

2017

2018

Inflation projection of the NBP based on the NECMOD model

In the euro area the expected continuation of moderate recovery based on consumption

14 Growth in wage fund and average wages and decomposition of employment by sectors

6

5 4

3 2



Recovery in the euro area based mainly on consumption, along with moderate and variable impact of private investment

1 0 -1 -2 -3





The increase in households income results rather from higher probability of finding job than from wage hikes.

New jobs are created mainly in low-paid sectors, which decrease wage pressure.

2007

2008

2009

2010

2011

2012

Decomposition of employment by sectors: low-paid

medium-paid

nominal wages y/y

wage fund y/y

2013

2014

2015

2016

high-paid

Goods exports outside the euro area against average from 2002-2007 (dashed lines)

10 8



Regulatory uncertainty, slowdown in global trade and low global investment demand are reflected in Eurozone export dynamics.

6 4 2 0 -2 -4 2012

2013

2014

intermediate goods (%, y/y, smoothed) Source: Eurostat.

consumption goods (%,y/y, smoothed)

2015

2016

investment goods (%,y/y, smoothed)

Inflation projection of the NBP based on the NECMOD model

15

Short-term impact of Brexit on the British economy weaker than expected

 Situation on financial markets after referendum remains stable, except for exchange rate, which strongly depreciated.  PMI indicators signalled downturn in July this year, however in August they mounted back to their pre-referendum level.  Increased uncertainty might contribute to a fall in investments in 2016q3.

1.5 1.0

90 2014

2015 2016 Obligacje korp (rentowności) -L Corporate bonds (yields) – L FTSE AllShare Share– -RR FTSE All NEER GBP- -RR NEER GBP

Source: Datastream * FTSE index transformed (January 2014=100)

50

85 45

2014 2015 Przetwórstwo Usługi Industry Services Source: Markit Economics

2016 Budownictwo Construction

0

1

-5

0

-10

-1

-15

-2

-20

-3

-25

-4

Inwestycje (y/y) (r/r) -- LL Investments Source: Bank of England, ONS

2016

95

55

2

2015

2.0

3

5

2014

100

10

2013

60

4

2012

2.5

15

2011

105

65

2010

110

2009

Referendum

Investment plans of enterprises versus investments

2008

3.0

PMI indicator by sectors

2007

Effective exchange rate of pound and the situation on stock and corporate bonds markets*

Plany inwestycyjne Investment plans - R - R

Inflation projection of the NBP based on the NECMOD model

16

The main factor supporting economic growth in the United States is private consumption Real GDP level in the current expansion phase

Private consumption Inventories Public consumption Source: BEA, IE.

Private investments Net exports GDP

2018 P

2017 P

2016 P

2015

2014

2013

2012

2011

2010

2009

2008

2007

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

50 45 40 35 30 25 20 15 10 5 0 -5

Volatility Average t= 2009q2

t t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16 t+18 t+20 t+22 t+24 t+26 t+28 t+30 t+32 t+34 t+36 t+38

Real GDP dynamics and its structure (%, y/y)

Quarters Level on the graph is cumulated percentage change; own calculations based on quarterly chronology of business cycle according to NBER; quarter t is a bottom of economic activity; volatility (given by range) and average come from paths of real GDP level in period of 50 after-war expansion and recession phases; vertical line is 2016q2, which is last available data in the current forecasting round Source: BEA, IE.

 Outlook for economic growth in the United States deteriorated comparing to the previous projection in line with prolonged adjustments of private investments and inventories, downturn in the industry, but also weak demand in the external environment of the US economy.  The main factor supporting economic growth in forecast horizon is private consumption, which, so far, is driven by very good labour market conditions.

Inflation projection of the NBP based on the NECMOD model

Outline:

Changes between rounds Projection 2016 – 2018 -

External environment

-

Consumption demand

-

Investment demand

-

Foreign trade

-

Inflation

Uncertainty

Consumption demand

17

Inflation projection of the NBP based on the NECMOD model

18

Consumption demand as the main driver of GDP growth in projection

Private consumption:

Public consumption (y/y) (%) y/y, %

Private consumption (y/y) (%)



Progress in households’ financial situation – programme „Family 500 plus”

8



Very good labour market conditions

6

6



Improvement in consumer sentiment

4

4



Low interest rates facilitate financing consumption through borrowing

2

2

Public consumption:

0

0



-2

-2

2017 Budget Act – low growth rate of current expenditure and spending on targeted subsidies

-4

-4



2018 - lack of detailed information on the continuation of cutting public expenditure

10

10

8

-6 -6 09q1 10q1 11q1 12q1 13q1 14q1 15q1 16q1 17q1 18q118q4 y/y, %

Source: GUS data, NBP calculations

2015

2016

2017

2018

Private consumption

3.1

3.7

4.1

3.5

Public consumption

3.4

2.5

3.1

3.9

Inflation projection of the NBP based on the NECMOD model

19

An increase in family benefits leads to an improvement in households’ financial situation  Since April 2016, family benefits increased with implementation of the „Family 500 plus” programme.  Due to the intertemporal consumption smoothing mechanism, additional means will affect household expenditure growth with a lag.

Decomposition of disposable incomes (constant prices) (y/y, %) Operating surplus

Property income

Wage fund

Net transfers and taxes

Disposable income (y/y, %)

8

8

6

6

4

4

2

2

0

0

Private consumption (y/y) (%) y/y, % 8

Disposable income (y/y) (%) 8

7

7

6

6

5

5

4

4

3

3

2

2

1

1

0

0

-1

-1

-2 09q1

10q1

11q1

12q1

13q1

Source: GUS data, NBP calculations , Eurostat

14q1

15q1

16q1

17q1

-2 18q1 18q4

-2

15q1

16q1

17q1

18q1

18q4

-2

Inflation projection of the NBP based on the NECMOD model

20

Consumption is driven by very good labour market conditions and favourable consumer sentiment Wage fund (y/y) (%) Private consumption (y/y) (%)

16q2

16q3

ULC (y/y) (%)

2.2

(1.8)

2.4

(1.9)

Labour productivity (y/y) (%)

1.9

(2.2)

1.9

(2.4)

Gross wages (y/y) (%)

4.3

(4.0)

4.4

(4.3)

Employment LFS (y/y) (%)

1.2

(1.3)

1.0

(0.9)

Unemployment rate LFS (%)

6.3

(6.2)

5.7

(6.0)

56.4

(56.3)

56.3

(56.3)

8

8

6

6

4

4

2

2

0

0

-2 09q1

10q1

11q1

12q1

13q1

14q1

15q1

16q1

17q1

-2 18q1 18q4

Consumer confidence indicators 5 -5 -15

Participation rate (%)

-25 -35

Values from the July projection are given in brackets (seasonally adjusted). Indicators with values higher than in the July projection are marked green, whereas indicators with lower values are marked red. Source: GUS data, NBP calculations

-45 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 current (s.a.)

leading (s.a.)

Inflation projection of the NBP based on the NECMOD model

21

Further gradual slowdown in employment growth in the projection horizon … Unemployment rate

Vacancies and difficulties with hiring employees Employment (y/y) (%) Participation rate (%, RHS) 6

LFS unemployment rate s.a. Registered unemployment rate s.a.

57

15%

5 4

56

8.9%

10%

3 2

55 6.4%

1 0

5%

54

-1 -2 53 09q1 10q1 11q1 12q1 13q1 14q1 15q1 16q1 17q1 18q118q4

0% Vacancies

15-24 years old

Participation rate in the given age group (%, LHS ) 25-44 years old

35

18

88

16 14

34

12 10 8 6 4 2 0

33

32 09 10 11 12 13 14 15 16 17 18

87

85 09 10 11 12 13 14 15 16 17 18

06

07

08

09

10

11

12

13

14

15

16

Share of age group in the population (%, RHS) 45-60/65 years old 60/65+ years old

40

74

35

35

72

30

30

70

25

25

68

20 86

Difficulties with hiring employees

20

10

30

8

25

20

6

15

66 15

15

64

10

62

10

5

60

5

0

58

4

10

2 0

09 10 11 12 13 14 15 16 17 18

Source: GUS data, NBP calculations , Quick Monitoring NBP

5

0

0 09 10 11 12 13 14 15 16 17 18

Inflation projection of the NBP based on the NECMOD model

22

Preferred vs actual number of hours worked per week (s.a.)

… with accelerating wage dynamics …

41.5

Average number of hours of work per week Preferred working time per week

41

Nominal wages (y/y) (%) Real wages (y/y) (%)

40.5

8

8

6

6

4

4

40 2007 I 2008 I 2009 I 2010 I 2011 I 2012 I 2013 I 2014 I 2015 I 2016 I

Wage pressure higher pressure (L)

2

0

pressure as usual (L)

no pressure (P)

14

70

12

60

10

50

8

40

6

30

4

20

2

10

2

0

-2 -2 09q1 10q1 11q1 12q1 13q1 14q1 15q1 16q1 17q1 18q1 18q4

0 Source: GUS data, NBP calculations , Quick Monitoring NBP

0 2012

2013

2014

2015

2016

Inflation projection of the NBP based on the NECMOD model

23

… although still remaining at a moderate level The impact of changes in the number of employees and the "quality" of employment (qualifications) to the labour input

Percentage of firms planning to raise wages and percentage of employees having received a rise share ofprzedsiębiorstw enterprises s.a. odsetek s.a. share of employees s.a. odsetek zatrudnionych s.a. average of enterprises) średnia (%(% przedsiębiorstw) average of employees) średnia (%(% zatrudnionych)

Number of employed Average number of hours of work Change in "quality" of work Total labour input

50

5%

Unemployment gap Unemployment gap (p.p., RHS) Unemployment (%) NAWRU (%) 12

6

10

4

8

2

6

0

45 40

4%

35 30

3%

25 20

2%

15 10

1%

5

Source: Quick Monitoring NBP

0% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

0

Source: BARP NBP

4

09q1 10q1 11q1 12q1 13q1 14q1 15q1 16q1 17q1 18q118q4 Source: GUS data, NBP calculations

-2

Inflation projection of the NBP based on the NECMOD model

Outline:

Changes between rounds Projection 2016 – 2018 -

External environment

-

Consumption demand

-

Investment demand

-

Foreign trade

-

Inflation

Uncertainty

Investment demand

24

Inflation projection of the NBP based on the NECMOD model

25

After fall in 2016 positive investment growth rate, but lower than in the years 2014-2015

GFCF enterprises

GFCF public sector

GFCF housing

GFCF

12

12

10

10

8

8

6

6

4

4

2

2

0

0

-2

-2

-4

-4

-6

-6

-8

-8

-10

09q1 10q1 11q1 12q1 13q1 14q1 15q1 16q1 17q1 18q1 18q4

-10

Private investment:  Low use of funds from 2014-2020 financial perspective  High uncertainty including that about legal environment  High investment plans and capacity utilization  Good financial situation of firms and low energy prices Public investment:  2016: the utilisation of 2014-2020 funds developing gradually  2017: increase in the amount of contracts for the future use of EU funds Housing investment:  Good labour market conditions  Tighter credit conditions (Recommendation S)  The high profitability of housing investment y/y, % Gross fixed capital formation

Source: GUS data, NBP calculations

2015

2016

2017

2018

5.8

-2.6

6.1

5.4

Inflation projection of the NBP based on the NECMOD model

26

A drop in investment in 2016 – mainly public, but also lower corporate investment dynamics

Public investments dynamics by expenditure type Others Local gov. units - domestic

The contribution of sectors in the growth rate of investment

Local gov. units - from EU Total public investments

30

30

20

20

10

10

Water

Services

Transport

Industry

Trade

Mining

Energy

Construction

Total 25 20 15

%

0

5

-10

-10

0

-20

-20

0

-5 -10

-30

-30 14q1 14q2 14q3 14q4 15q1 15q2 15q3 15q4 16q1 16q2

Source: Eurostat, MF, BGK

-15 2012

2013

Source: F01, NBP calculations

2014

2015

2016

y/y, %, current prices

10

Inflation projection of the NBP based on the NECMOD model

27

Enterprises surveys confirm the growth in investment in long run, although the growth rate might be lower than in 2014-2015 Quarterly forecast of demand, output and orders (s.a.)

Capacity utilization

86 84 82 80 78 76

30 25 20 15 10 5 0 -5 -10 -15 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

74

demand

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 mean values indicator indicator s.a.

Planned changes in investment outlays within a quarter and in the current year 20 10 0 -10 -20 2012

2013

2014

annual plans annual plans (major change balance)

2015

2016

quaterly plans quaterly plans (major change balance)

new orders

output

Assessment of the uncertainty

10 9 8 7 6 5 4 3 2 1 0

0 -5 -10 -15 -20 -25

2011

2012 2013 uncertainty as a barrier (LHS) uncertainty (RHS)

Source: Quick Monitoring NBP

2014

2015 2016 law changes as a barrier (LHS)

Inflation projection of the NBP based on the NECMOD model

28

Low utilisation of EU funds in 2016 gives grounds for lowering the pace of EU funds utilisation compared to the previous projection…

A fall in public investment in 2016 as a natural consequence of overlapping financial frameworks

Forecasts of the EU funds utilisation (without CAP and RDP)

The use of EU funds (without CAP and RDP) in the same periods prospects 20 18

6 Fin. framework 2007-2013

50

Fin. framework 2014-2020

VII 2016

Financial framework 2007-2013 Financial framework 2014-2020

5

16

40

14

35

10

PLN bn

PLN bn

% allocation

4 12

XI 2016

45

3

8

30 25 20

2

6 4

15 10

1

2

5

0

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: GUS data, NBP calculations. 2016-2018 data – NBP projection

0 q1

q2

q3

q4

q1

2008/2015 Source: MR, GUS data, NBP calculations

q2

q3

2016

2017

2018

2009/2016 Source: GUS data, NBP calculations. 2016-2018 data – NBP projection

Inflation projection of the NBP based on the NECMOD model

29

… at the same time growing number of contracts signed for the use of EU funds justifies the expected improvement in the absorption rate from 2017 Funds for road projects Framework 2014-2020

PLN bn

Cum. % of allocation

20 15 10 5 0 q1

q2

q3

q4

q1

2008/2015

q2

2007 2014

q3

2009/2016

2008 2015

Framework 2014-2020

2009 2016

2010 2017

2011 2018

EU funds for other purposes (without CAP and RDP) Framework 2007-2013

20

Framework 2014-2020 35

Framework 2007-2013

Framework 2014-2020

30 15

25 PLN bn

Cum. % of allocation

The stage of signing contracts

25

Framework 2007-2013

9 8 7 6 5 4 3 2 1 0

10

Source: GUS data, NBP calculations , MR. 2016-2018 data – NBP projection

5

20 15 10 5

0 q1

q2

q3

2008/2015

q4

q1

q2 2009/2016

q3

0 2007 2014

2008 2015

2009 2016

2010 2017

2011 2018

The stage of the use of funds

Framework 2007-2013 30

Inflation projection of the NBP based on the NECMOD model

Outline:

Changes between rounds Projection 2016 – 2018 -

External environment

-

Consumption demand

-

Investment demand

-

Foreign trade

-

Inflation

Uncertainty

Foreign trade

30

Inflation projection of the NBP based on the NECMOD model

31

Net exports contribution to growth will continue to limit GDP dynamics

Net exports contribution (p.p., RHS) Exports (y/y) (%)

Exports:

Imports (y/y) (%) 25

5

20

4

15

3

10

2

5

1

0

0

-5

-1

-10

-2

-15

-3

-20

09q1 10q1 11q1 12q1 13q1 14q1 15q1 16q1 17q1 18q1 18q4

Source: GUS data, NBP calculations

-4



Unfavourable outlook for global trade



Appreciation of the zloty exchange rate

Imports:  Acceleration of consumption and investment, while a decline in exports growth

y/y p.p. Net exports contribution

2015

2016

2017

2018

0.3

0.0

-0.6

-0.4

Inflation projection of the NBP based on the NECMOD model

32

y/y, % 12

Maintaining high growth of exports in the coming years will be difficult to achieve

Lower world import growth

10

8

United States

Euro area

Other developed economies

Asian emerging markets

Other emerging economies

World import growth

6 4 2 0 -2 2011

2012

Changes in world trade, GDP and income trade elasticity y/y, % 15

trade

GDP

2013

2014

The slowdown in the euro area trade

implied income trade elasticity

4

y/y, % 15

Trade within euro area Euro area imports Euro area exports

3

10

2 5

1

0

10

-1 -2

-10

2016

Euro area imports from Poland y/y, % 15

total imports imports of machinery and transport equipment

10 5

5

0

-5

2015

0

0

-5

-5

-3

-15

-4 1995

Source: WTO

1998

2001

2004

2007

2010

2013

2016

-10 2011

2012

Source: Eurostat

2013

2014

2015

2016

-10 2012 Source: Eurostat

2013

2014

2015

2016

Inflation projection of the NBP based on the NECMOD model

The gradual appreciation of the zloty, bringing the effective exchange rate to the equilibrium exchange rate

33

Decrease of current and capital account from record high level in the previous year

Remittances

Primary income

Secondary income

Goods and services

Current and capital account (% GDP)

Real effective exchange rate 4.8

4.8

6

6

4.6

4.6

4

4

4.4

4.4

2

2

4.2

4.2

0

0

4

-2

-2

3.8

-4

-4

3.6 17q1 18q1 18q4

-6

4 3.8 3.6 09q1

10q1 11q1 12q1 13q1 14q1

Source: GUS data, NBP calculations

15q1 16q1

-6 2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Inflation projection of the NBP based on the NECMOD model

Outline:

Changes between rounds Projection 2016 – 2018 -

External environment

-

Consumption demand

-

Investment demand

-

Foreign trade

-

Inflation

Uncertainty

Inflation

34

Inflation projection of the NBP based on the NECMOD model

35

Continuation of deflation - still highly influenced by energy prices, but the impact of supply oil shock fades away Non-food goods Services Energy Food and non-alcoholic beverages CPI

1 y/y, %

16q2 -0.9

(-0.9)

-0.8

(-0.6)

Core inflation

-0.3

(-0.3)

-0.4

(0.0)

0.8

(0.6)

0.9

(0.5)

0

-5.4

(-5.3)

-1

10

4

0

0

-4.4

(-4.0)

-4

-1 -20

-8

-30

-12

-40

-16

-3 -50 2014

Values from the July projection are given in brackets (seasonally adjusted). Indicators with values higher than in the July projection are marked green, whereas indicators with lower values are marked red.

-10

-2

-3

Source: GUS data, NBP calculations

1

0

-2 Energy prices inflation

CPI - fuel for personal transport (RHS)

16q3

CPI inflation

Food prices inflation

y/y changes of Brent oil prices in PLN

2015

2016

-20 2014

2015

2016

Inflation projection of the NBP based on the NECMOD model

36

Positive consumer price dynamics from 2016q4 although still below the NBP inflation target

Core inflation

Food prices

Energy prices

CPI inflation

Lack of demand pressure: 

Negative output gap

5

5

4

4

3

3

Limited cost pressure:

2

2



Low import price dynamics

1

1



Low levels of commodity prices

0

0



Moderate unit labour cost growth

-1

-1

-2

09q1

10q1

11q1

12q1

Source: GUS data, NBP calculations

13q1

14q1

15q1

16q1

17q1

18q1 18q4

-2 y/y, %

2015

2016

2017

2018

CPI inflation

-0.9

-0.6

1.3

1.5

Inflation projection of the NBP based on the NECMOD model

37

Lack of demand pressure reflected in the negative output gap

Economically active pop.

NAWRU

Capital

TFP

Output gap (% potential output)

GDP (y/y) (%)

Potential output (y/y) (%)

Potential output

4 3.5 3 2.5 2 1.5 1 0.5 0 -0.5

15q1

16q1

Source: GUS data, NBP calculations

17q1

18q1

18q4

4

6

6

3.5

5

5

3

4

4

2.5

3

3

2

2

2

1.5

1

1

1

0

0

0.5

-1

-1

0

-2

-2

-0.5

-3

09q1

10q1

11q1

12q1

13q1

14q1

15q1

16q1

17q1

18q1 18q4

-3

Inflation projection of the NBP based on the NECMOD model

38

Inflation pressure in the immediate environment of the Polish economy remains low

Inflation expectations* in Eurozone (%, y/y)

Euro area inflation (%, y/y) HICP

HICP - core

1-year

5

World Advanced economies Emerging market and developing economies

2-years 18

2.5

4

World inflation (%, y/y)

15

2.0

12

3

1.5

9

1.0

6

2 1

3

Source: Reuters, IE.

* Survey of Professional Forecasters Source: ECB.

Source: IMF.

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

-3 2005

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

0 2005

2016

2015

2014

2013

2012

2011

2010

2009

2008

0.0

2007

-1 2006

0.5

2005

0

Inflation projection of the NBP based on the NECMOD model

39

Low inflation in the euro area and appreciating exchange rate influence domestic import prices

Import prices excl. oil and gas prices (y/y) (%) y/y, %

Real effective exchange rate

Import prices (y/y) (%)

4.8

4.8

4.6

4.6

4.4

4.4

4.2

4.2

4

14

12

12

10

10

8

8

6

6

4

4

2

2

0

0

-2

-2

-4

-4

4

3.8 3.6 09q1

14

3.8

10q1 11q1 12q1 13q1 14q1

Source: Bloomberg, GUS, NBP calculations

15q1 16q1

3.6 17q1 18q1 18q4

-6 09q1

10q1

11q1

12q1

13q1

14q1

15q1

16q1

17q1

-6 18q1 18q4

Inflation projection of the NBP based on the NECMOD model

Lower downward pressure on oil prices 120

100



40



Higher inventories

Increasing drilling activity The number of active drilling rigs in the US

Market oil inventories in OECD countries 3150

400

3000

300

2850

200

2700

1800

50

1500

25

1200

0

900

-25

100

600

-50

2550

0

300

-75

2400

-100

80 2014

2015

2016

y/y change (mln b/d-RHS)

0 2014

-100

2015

2016

weekly changes in the number of drilling rigs the number of active drilling rigs in the US

level (mln b/d)

60



Uncertain future actions of OPEC Oil production in Saudi Arabia (mln b/d)

11

40

Current vs previous forecast 120 VII 2016

XI 2016

105 10.5

90 75

10

20 2014

2015

daily

monthly average

2016

quaterly average

Source: US Department of Energy, Bloomberg, Bureau of Economic Analysis

60 9.5 9 2013

45

2014

2015

2016

30 2014

2015

2016

2017

2018

Inflation projection of the NBP based on the NECMOD model

41

Other commodity prices – similarly to oil – expected to remain at low level

1.2

Index of agricultural commodity prices (EUR, 2011=1) VII/16 Index of energy commodity prices (USD, 2011=1) VII/16

Food prices inflation (%)

y/y, %

Energy prices inflation (%)

1.2

12

1.1

10

10

1

8

8

0.9

0.9

6

6

0.8

0.8

4

4

0.7

0.7

2

2

0.6

0.6

0

0

0.5

0.5

-2

-2

-4

-4

0.4

0.4 -6

-6

1.1 1

0.3 09q1 10q1

11q1 12q1

13q1 14q1 15q1

Source: GUS data, NBP calculations, Bloomberg, Reuters

16q1 17q1

0.3 18q1 18q4

-8 09q1

10q1

11q1

12q1

13q1

14q1

15q1

12

16q1

17q1

-8 18q1 18q4

Inflation projection of the NBP based on the NECMOD model

42

Moderate unit labour costs growth supports slow return of inflation to the target

CPI inflation (%)

ULC (y/y) (%) (LHS)

y/y, %

Core inflation (%)

Import prices excl. gas and oil prices (y/y,%) (RHS)

5

5

4

4

3

3

7

14

6

12

5

10

4

8

2

2

3

6

1

1

2

4

0

0

1

2

0

0

-1

-1 -1

-2

-2 09q1

10q1

11q1

12q1

Source: GUS data, NBP calculations

13q1

14q1

15q1

16q1

17q1

-2 18q1 18q4

-2 09q1

10q1

11q1

12q1

13q1

14q1

15q1

16q1

17q1

-4 18q1 18q4

Inflation projection of the NBP based on the NECMOD model

Outline:

Changes between rounds Projection 2016 – 2018 -

External environment

-

Consumption demand

-

Investment demand

-

Foreign trade

-

Inflation

Uncertainty

Uncertainty 

Risk factors



Fan charts

43

Inflation projection of the NBP based on the NECMOD model

Risk area

The deterioration of growth prospects in a global economy

Description

44

Impact

Scale of impact

 Weaker growth outlook in China (banking system stability, weaker than expected effect of government’s stimulating measures, mounting imbalance in the housing market).  Uncertainty about the shape of UK exit from EU agreement.  Political uncertainty: elections in Germany, France, constitutional referendum in Italy and presidential elections in the United States.

The increase in domestic demand due to improved economic situation in the euro zone

 Faster economic growth in the Eurozone: - stronger effect of the ECB bond purchase program, - deeper depreciation of the euro against the dollar, - higher scale of fiscal policy loosening, - positive impact of the European Commission’s Investment Plan.

Crude oil prices in the global markets

 Supply disruptions in the global oil markets: - possible agreement of OPEC countries on oil production in the coming years, - resumption of production at the bottom of the Caspian Sea, - increase in the number of drilling rigs in the United States as a result of higher oil prices,

Inflation 

GDP 

Inflation  GDP 

**

Inflation  GDP 

 Growth prospects in the global economy (especially in emerging countries). Inflation  Conclusions

**

GDP 

*

Inflation projection of the NBP based on the NECMOD model

CPI inflation y/y, % 90%

60%

45

GDP y/y, % 30%

central path

90%

inflation target

60%

30%

central path

5

5

8

8

4

4

7

7

3

3

6

6

2

2

5

5

4

4

1

1 3

3

0

0

2

2

-1

-1

1

1

-2

-2

0

0

-3 13q1

14q1

15q1

16q1

17q1

in the range

18q1

CPI y/y, %

below 1.5%

below 2.5%

below 3.5%

below centr.path

2016

100%

100%

100%

52%

0%

2016

2017

61%

89%

99%

54%

37%

2018

53%

75%

90%

53%

37%

Source: GUS data, NBP calculations

1.5-3.5%

-3 18q4

-1 13q1

14q1

15q1

16q1

17q1

50% probability interval

GDP y/y, %

-0.6

-0.7

-0.6

2016

3.0

2.5

3.4

2017

1.3

0.5

2.0

2017

3.6

2.6

4.5

2018

1.5

0.3

2.6

2018

3.3

2.2

4.4

CPI y/y, %

central path

central path

-1 18q4

18q1

50% probability interval