Macroeconomic environment

2020 ended with a GDP dynamics of -2.8%, which is obviously less than we expected in late 2019, when bank’s forecast was at +2.8%. The gap was opened by the COVID-19 pandemic, which started in Wuhan, China, and spread globally. At the time of this writing, there were 100 million infections (identified cases) and more than 2 million fatalities (1.5 million and 35k, respectively, in Poland). The transmission of the virus was lightning-quick. We first downgraded our projections in early March, bottoming in early April when we expected -4.2% GDP dynamics and unemployment rate over 10%.

Comparing the pre-pandemic projections with actual figures, COVID-19 shaved an estimated -5.4 pps off GDP growth in 2020.

Projection downgrades were triggered by mass-scale economic lockdowns, combined with epidemic restrictions and consumers’ self-restraint, resulting in shrinking consumer and investment demand: a demand shock. The supply side was similarly affected by supply chain disruptions. Determined measures taken by monetary (see below) and fiscal authorities (sharp increase of the public deficit, support schemes for households and companies) helped to cushion the economic shock, especially in household and corporate debt, preventing massive job reductions. The official unemployment rate eventually rose to only 6.2% at the year’s end. The economy enjoyed a rapid recovery in Q3 after the epidemic lockdown was lifted. Economic activity bottomed out in Q2 when GDP dropped -8.4% YoY.

The second wave of lockdowns in the autumn was less harsh on the economy despite bigger numbers of new infections and fatalities and a heavy strain on the health care system. What helped was that companies had adapted while both companies and households had built up liquidity. Industry was largely spared the impact of the second wave of the contagion: catching up quickly, with exports, it became the driver of the economy. Meanwhile, many service and trade operators remained under a strict regime. The recovery of the Chinese economy came as a relief: having contained the contagion in the spring, it was back on track with a positive GDP trajectory.

The pandemic hit the economy at a time of rising core inflation and record-high CPI. Inflation soared in Q1, driven by high food prices, still strong economic activity, a robust labour market, and rising controlled prices.

Nonetheless, faced with the prospect of sharply falling domestic demand and a broad demand gap, monetary policy had to be quickly relaxed. The National Bank of Poland (NBP) cut the interest rates three times (by 1.4 pps in aggregate to 0.1%) and reduced the mandatory reserve rate (from 3.5% to 0.5%). NBP also started to purchase Treasuries and securities guaranteed by the government in structural operations in order to bolster market liquidity and ensure that low rates transmit across the economy. Currency interventions geared at PLN depreciation started in December, also aiming to improve interest rate transmission in the economy.

Meanwhile, CPI started to dwindle. The drop in inflation was mainly driven by sharply falling prices of energy commodities and low food prices. Core inflation continued to rise throughout the pandemic on the back of inertia in the service sector that originated during the previous market cycle combined with new epidemic-related fees which many companies imposed as a cost line improving client safety. However, the uptrend in core inflation reverted late in the year. In our opinion, core inflation will continue falling for many months to come in line with typical macroeconomic relations.

As the pandemic hit the economy, the Polish zloty depreciated with EURPLN rising to around 4.60. However, the Polish currency was under moderate appreciation pressure later in the year. The Monetary Policy Council (RPP) warned that “the growth rate could be curbed in the absence of a stronger and more lasting PLN alignment with the global shock caused by the pandemic and NBP’s relaxed monetary policy.” In December, NBP opted for interventions in order to weaken PLN. In January, RPP stressed that “NBP could also resort to currency market interventions in order to boost the economic impact of the relaxed monetary policy.” After the interventions, EURPLN stabilised above 4.50. Many RPP members have stated that 4.40-4.50 is the rate “optimal” for the economy.

Polish Treasury bond yields were in a downtrend throughout 2020. They rose temporarily when the pandemic broke out but subsequent developments gave rise to a year-long downtrend as interest rates were cut close to nil while other central banks pursued a very relaxed monetary policy combined with aggressive asset purchase programmes. The trend was expedited by NBP’s structural operations. The Polish central bank purchased more than PLN 100 billion bonds in 2020 and absorbed in large part the supply of PFR and BGK bonds. Other key factors included high liquidity in the banking industry as well as bond purchases by commercial banks.

Banking sector

Although corporate deposits tend to be procyclical in line with GDP trends, it is not what happened in 2020. Unprecedented fiscal policy measures (government support schemes and additional support from PFR) boosted deposit volumes. In certain months, net of the FX effect, deposits would rise by nearly 30% year on year. Support for liquidity and debt (preferential loans, subsidies) helped companies to remain relatively resilient and put the economy on track to recovery after the lockdown was lifted. At the time of this writing, additional corporate subsidy schemes are being offered to companies affected by the lockdown during the second wave of the contagion. Lending evolved as it would during a recession: it shrank.

Household deposit volumes also rose sharply. On the one hand, consumers curbed their spending. On the other hand, the growth rate of the total salary pool remained positive, pumping cash into households’ accounts. In addition, support schemes were offered to households (support for the unemployed). Interestingly, the pandemic brought a massive increase in appetite for cash. Cash in the economy increased by PLN 81 billion, i.e. 37% year on year in 2020. The strong increase in cash most likely reflects changing preferences of some households which are turning away from deposits as offered interest rates are hardly ever positive after NBP cut its reference rate to 0.1%. As for lending, demand of households dropped as did demand for corporate loans. Mortgage loans suffered much less than consumer credit.