Inflation and economic growth projection of Narodowy Bank Polski based on the NECMOD model

Transcription

1 Economic Analysis Department Inflation and economic growth projection of Narodowy Bank Polski based on the NECMOD model Warsaw / 13 November 17

2 Inflation projection of the NBP based on the NECMOD model Outline Outline: Changes between rounds Projection External environment - Consumption demand - Investment demand - Foreign trade - Inflation 1 Changes between projection rounds Projection Uncertainty Uncertainty

3 Inflation projection of the NBP based on the NECMOD model 3 Outline: Changes between rounds Projection Changes between projection rounds - External environment - Consumption demand - Investment demand - Foreign trade - Inflation Uncertainty

4 Inflation projection of the NBP based on the NECMOD model November GDP projection compared to July projection p. p.. Private consumption Gross capital formation GDP Public consumption Net exports. Higher private consumption growth (better-than-expected data for 17Q and more favourable readings and the prospects of wages and employment growth). Higher contribution of net exports to GDP growth in 17 (the positive balance of payments for July-August 17)... Higher growth in investment in 1 as a result of the postponement of some public sector s expenditures. Downward revision of the inventory forecast in 17H Lower growth in current expenditures in the public finance sector (wage freeze in some sectors of public administration in 1 Draft Budget) GDP y/y, % July November Source: GUS data, NBP calculations.

5 Inflation projection of the NBP based on the NECMOD model November CPI projection compared to July projection Higher prices of energy commodities in the global markets. p. p.. Core inflation Energy prices Food prices CPI inflation. Lower availability of some agricultural products in the domestic market. Increase in demand and cost pressure in the long term... Higher growth in the prices of agricultural commodities in the global markets in 19. Lower core inflation in 17 (lower-than-expected growth in prices of services related to dwellings and transport services) CPI y/y, % July November Source: GUS data, NBP calculations.

6 Inflation projection of the NBP based on the NECMOD model Changes between projections GDP y/y, % r/r, % 9% % 3% Jul 17 Nov 17 CPI inflation y/y, % r/r, % 9% % 3% Jul 17 Nov 17 Inflation target q1 1q1 1q1 17q1 1q1 19q1 19q - - 1q1 1q1 1q1 17q1 1q1 19q1 19q Source: GUS data, NBP calculations.

7 Inflation projection of the NBP based on the NECMOD model 7 Outline: Changes between rounds Projection External environment - Consumption demand - Investment demand - Foreign trade - Inflation Uncertainty Projection Economic conditions abroad Consumption demand Investment Foreign trade Inflation

8 Inflation projection of the NBP based on the NECMOD model GDP growth is likely to accelerate in the second half of 17 17q 17q3 GDP (y/y) (%) 3.9 (.). (.) 1 Industrial and constr. production y/y Real wage fund y/y Retail sales y/y GDP y/y (RHS) 1 Domestic demand (y/y) (%). (.9).7 (.) Private consumption (y/y) (%).9 (.7).7 (.) Public consumption (y/y) (%). (3.) 3.3 (3.3) Gross fixed capital form. (y/y) (%). (1.1).1 (7.) Exports (y/y) (%). (.9). (7.) Imports (y/y) (%).1 (9.1) 7. (9.) - - Net exports contribution (p.p.) -1. (-.7) -.1 (-.7) Values from the July projection are given in brackets (17q3 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. - 9q1 1q1 11q1 1q1 13q1 1q1 1q1 1q1-17q3

9 Inflation projection of the NBP based on the NECMOD model 9 In 17 GDP is expected to grow at.% and in the years 1-19 will slow down to the level close to the potential output growth 7 Consumption Change in inventories GDP Gross fixed capital formation Net exports 7 Private consumption as the main factor behind GDP growth over the projection horizon due to further improvement in the labour market and in short term - payments of benefits under the Family plus programme 3 3 Economic growth driven also by positive gross fixed capital formation dynamics supported by the inflow of EU funds under the 1- financial framework The decline in GDP growth in the euro area (negative contribution of net exports to growth in 19 as a result of a slowdown in the domestic demand). -3 1q1 17q1 1q1 19q1 19q -3 y/y, % GDP Source: GUS data, NBP calculations.

10 Inflation projection of the NBP based on the NECMOD model 1 Outline: Changes between rounds Projection External environment - Consumption demand - Investment demand - Foreign trade - Inflation Economic conditions abroad Uncertainty

11 Inflation projection of the NBP based on the NECMOD model 11 The November projection assumes a higher GDP growth in the external environment in 17-1 High readings of current activity indicators and both consumer and business sentiment. Stronger economic growth in the euro area. Higher growth path in China. Weak long-term global economic outlook due to low productivity growth and unfavourable demographic trends. Weak medium-term outlook for global trade growth PMI in industrial production (deviation form pts) - Oct-1 Feb-1 Jun-1 Oct-1 Feb-1 Jun-1 Oct-1 Feb-17 Jun-17 World Advanced economies Developing economies Consumer sentiment (deviation from -17 average) GDP y/y, % Euro area. (1.9) 1.9 (1.7) 1. (1.) Germany. (1.9) 1.9 (1.7) 1. (1.) United States. (.). (.).1 (.1) United Kingdom 1. (1.) 1. (1.) 1.7 (1.7) Values from the July projection (seasonally adjusted) are given in brackets. Figures with values higher than in the July projection are in green, whereas those with lower value are in red Jan-1 Aug-1 Mar-13 Oct-13 May-1 Dec-1 Jul-1 Feb-1 Sep-1 Apr-17 Developing economies Advanced economies Source: OECD, Thomson Reuters Datastream, NBP calculations. Consumer sentiment: averages of the group of countries are weighted by the nominal GDP in PPP terms. Developed economies: The Czech Republic, Denmark, Israel, Japan, Republic of Korea, New Zeland, Norway, euro area, US, Sweden, Switzerland, UK. Emerging economies: Brazil, China, Mexico, Poland, Russia, South Africa, Hungary, Turkey.

12 Inflation projection of the NBP based on the NECMOD model 1 In the short run - a lower inflation is expected in Poland s external environment Despite positive output gap consumer price inflation in the US is lower than expected in 17. The forecast of inflation in the euro area has been lowered due to revised estimates of potential output growth in the EA. 3 CPI inflaction in advanced economies (%, y/y) 3... Consumer inflation in main developed economies excluding food and energy prices (%, y/y) Jan-1 Aug-1 Mar-13 Oct-13 May-1 Dec-1 Jul-1 Feb-1 Sep-1 Apr-17 Japan United Kingdom United States Euro area -1. Jan-1 Jul-1 Jan-13 Jul-13 Jan-1 Jul-1 Jan-1 Jul-1 Jan-1 Jul-1 Jan-17 Jul-17 Japan United Kingdom United States Euro area Source: OECD.

13 Inflation projection of the NBP based on the NECMOD model 13 The heightened uncertainty about inflation outlook due to persistently low wage growth Despite tight labour markets conditions, wage growth in the main developed economies remains weak. Low wage pressure is due, inter alia, to: i) sluggish growth in labour productivity; ii) low inflation expectations; iii) still low labour utilisation in some countries; iv) increase in labour participation in the groups with lower wages (women, elderly people); v) reduced workers wage-bargaining power and higher preferences for the job security and benefit packages over the wage increase; vi) an increased importance of temporary or part-time jobs, vii) an impact of structural reforms; viii) a declining number of hours worked Unemployment rate in selected developed countries Jan-1 Oct-1 Jul-13 Apr-1 Jan-1 Oct-1 Jul-1 Apr-17 Source: OECD. Japan United States United Kingdom Euro area 1. Economies characterised by lower unemployment rate than the average of Factors explaining the deviations of wage growth from the average of -7 according to IMF research (WEO, 17): Economies characterised by markedly higher unemployment rate than the average of Delayed inflation Trend in productivity growth Unemployment rate Share of workers forced to work part-time The rest Wage dynamics

14 Inflation projection of the NBP based on the NECMOD model 1 Labour market in G7 countries Labour share (% of GDP) Labour productivity and wages (19=1) Source: BIS, 7th Annual Report.

15 Inflation projection of the NBP based on the NECMOD model 1 Labour market in G7 countries Labour s pricing power (%) Unemployment gap Source: BIS, 7th Annual Report.

16 Inflation projection of the NBP based on the NECMOD model 1 Expected stabilization of oil prices 1 WTI oil prices and number of drilling rigs in United States 1 Brent oil prices (USD/b) WTI oil prices ( months shifted) the number of active drilling rigs (RHS) daily monthly average quarterly average Source: Bloomberg. Oil production in the United States (mln b/d) oil production in the US EIA forecast Oct 17 Source: The United States Department of Energy.

17 Inflation projection of the NBP based on the NECMOD model 17 Outline: Changes between rounds Projection External environment - Consumption demand - Investment demand - Foreign trade - Inflation Consumption demand Uncertainty

18 Inflation projection of the NBP based on the NECMOD model 1 Consumption demand as the main driver of GDP growth in the projection Private consumption: Good labour market conditions. Public consumption (y/y, %) y/y, % Private consumption (y/y, %) q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1 19q119q Improvement in consumer sentiment. In 17 GDP growth supported by the Family Plus programme. Low interest rates facilitate financing consumption through borrowing. Purchasing power of households reduced by rising inflation Public consumption : Relatively slow growth in current expenditures and in subsidies financing current expenditure of other units of the sector (17 Budget Act and draft 1 BA, incl. further wage freeze of part of the government sector workers) Lack of detailed information on the continuation of cutting public expenditure in 19. y/y, % Private consumption Public consumption Source: GUS data, NBP calculations.

19 Inflation projection of the NBP based on the NECMOD model 19 Good households financial situation Further decline in unemployment rate and acceleration of wage growth are expected, although the purchasing power of households will be reduced by rising inflation. In 1-17 dynamics of households disposable income will be elevated by the growth in family benefits, due to the programme Family plus, which was implemented in April 1 (it will affect private consumption with a lag due to the intertemporal consumption smoothing mechanism). y/y, % Private consumption (y/y, %) Disposible income (constant prices) (y/y) (%) 1 Disposable income decomposition (constant prices) (y/y, %) Net transfers and taxes excl. plus plus Wage fund Property income Operating surplus Disposable income (y/y, %) q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1 19q1 19q - 1q1 17q1 1q1 19q1 19q - Source: GUS data, Eurostat, NBP calculations.

20 Inflation projection of the NBP based on the NECMOD model Consumption is driven by favourable consumer sentiment and very good labour market conditions Consumer confidence indicators 1-17q 17q3 ULC (r/r, %),7 (1,) 3,1 (1,9) Labour productivity (y/y,%) 1,9 (,7), (,) Gross wages (y/y, %), (,3), (,) current (s.a.) leading (s.a.) Employment LFS (y/y, %) 1,9 (1,),3 (1,3) Unemployment rate LFS (%),9 (,1), (,) Participation rate (%),7 (,),7 (,3) 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 Financial situation of households and risk of unemployment Current financial situation of housholds Financial situation of households in the next 1 months Fear of being unemployed

21 Inflation projection of the NBP based on the NECMOD model 1 Increasing participation rates, but labour supply affected by changes in the demographic structure Changes in population and participation rate Participation rate in the given age group (%, LHS ) Share of age group in the population (%, RHS) Population (s.a.) (y/y) (%) Participation rate (%, RHS) years old - years old q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1 19q1 19q / years old /+ years old Source: GUS data, NBP calculations

22 Inflation projection of the NBP based on the NECMOD model The lowest in the history probability of loosing job and transition from employment to inactivity % 1% 1% 1% 1% 1% % % % Probabilities of flows between employment (E) and unemployment (U).%.% 1.% 1.%.% % U->E (s.a., LHS) E->U (s.a., RHS) %.% The lowest in the history probability of loosing job (E->U). The highest in the LFS history (since 199) probability of the transition from unemployment to employment (U->E) Flows to and from inactivity (N) (number of people in thous. per quarter) E->N U->N N->E N->U Recent increase of LFPR of people aged + reflected in the drop of the flows from employment to inactivity (E->N). Companies retain + employees. Since 13 higher intensity of transitions between inactivity (N) and unemployment (U) due to activation of people loosely attached to labour market. This positively influences labour supply. Source: GUS data, NBP calculations.

23 Inflation projection of the NBP based on the NECMOD model 3 Growing labour force participation of people + on the eve of lowering retirement age Labour force participation and its changes Changes in labour force participation by distance to age / / / QoQ change (LHS) YoY change (LHS) Level Q (RHS) M (LHS) Level M (RHS) F (LHS) Level F (RHS) / years old Unitil the second quarter of 17, despite the planned lowering of retirement age, labour force participation is growing faster than in the corresponding quarters of 1 lack of workers? Biggest changes do not apply to retirement age, but 3- years before retirement and are related to job retention of older workers Source: GUS data, NBP calculations.

24 Inflation projection of the NBP based on the NECMOD model Labour force participation in the pre-retirement age is still lower than in the EU average Labour force participation rates - Males Labour force participation rates - Females LFPR, Male, Poland LFPR, Male, EU LFPR, Female, Poland LFPR, Female, EU Labour force participation of people at prime-age is close to the EU average of. Despite the reduction of early retirement in Poland, there is still a problem of the relatively low activity of men aged + in relation to the EU. Successive generations are more and more active in the labour market - there is a potential for increased labour force participation. Lower than average in the EU labour force participation of women up to the age of is associated with a high level of academic enrollment, mainly in full-time studies. Labour force participation of women aged - does not differ significantly from the EU average. Quite early retirement remains a problem due to retirement age ( years), although there is a potential for further growth in labour force participation for people aged of -9. Source: Labour force sourvey.

25 Inflation projection of the NBP based on the NECMOD model Good labour market situation can spread over time the effects of lowering the retirement age The number of retirees (thous.) 1Q1 1Q1 1Q1 1Q1 1Q1 Q1 1 - before increase of the retirement age 1 - last projection before reverse of the reform Labour force participation of people within the retirement age Without pension benefits With pension benefits Distance to retirement M 1F 13M 13F 1M 1F According to GUS data, the number of retirees and pensioners in Q1-Q3 17 was lower than in the projection of 1, which did not take into account lowering of retirement age. This is due to the good situation on the labour market. According to The Polish Social Insurance Institution (ZUS) estimates, applications for retirement due to lowering the retirement age could amount to about 33 thousand. people by the end of 17. The NBP's assessment is similar, but submitting the application does not mean that the number of retirees will increase immediately. Therefore, estimates of the increase in the number of pensioners are slightly lower and spread over time because:: - submitting the application does not mean going for retirement - to retire, employment contract need to be terminated, - some people may need time to collect all the documents needed to establish the initial capital. In the current projection, the jump in the number of retirees due to lowering the retirement age will be visible in the fourth quarter of 17 and the first quarter of 1. Moreover, in the coming years people who are approaching the age of / (who would have to wait longer for retirement based on old regulations) will retire early. Historically low unemployment can cause the labour force participation of retired people to decline not as rapidly as it has been observed in the past. Source: GUS data, NBP calculations.

26 Thous. Thous. Inflation projection of the NBP based on the NECMOD model Immigration from Ukraine Number of immigrants on the Polish labour market (mostly from Ukraine) Work permits Declarations of the intention to entrust a job to a foreigner Visas issued on the basis of declaration Arrivals of Ukrainians to Poland (excl. LBT) - rhs 1% 9% % 7% % % % 3% % 1% % Structure of employer's declarations by sector I poł. 17 Agriculture Industry Construction Services Data for the first half of 17 indicate that Poland issued over 1 thous. work permits for foreigners and registered 9 thous. employer's declarations that form the basis for applying for a visa. In 17, the number of immigrant workers in Poland may be % higher than in the previous year. These estimates is confirmed by the growing number of border crossings between Poland and Ukraine Total change in sectoral structure of immigrant jobs in 1-1. Most of the immigrants work in services, there is also a significant increase in employment in the industry. Permanent employment contracts are more and more frequent in sectors with less underground economy than in agriculture and construction. Source: The National Border Guard and Ministry of Family, Labour and Social Policy data, NBP calculations..

27 Thous. Thous. Inflation projection of the NBP based on the NECMOD model 7 The recent liberalization of EU visa policy towards Ukraine does not result in significant outflow of immigrants from Poland UA citizens in Germany by length of stay (level) UA citizens in Germany by length of stay (YoY change) <1Y 1-Y -1Y >=1Y <1Y 1-Y -1Y >=1Y Total YoY change Since June 17 Ukrainians are exempted from EU short-stay visa requirements. Although visa liberalisation doesn t mean opening of the EU labour market. Regarding the legalization of employment regulations have not changed. The scale of migration flows of Ukrainian citizens to Germany seems to be low compared to Poland. Long- and medium-term immigrants dominate in the structure of Ukrainian migration to Germany. Source: GUS data, NBP calculations.

28 Inflation projection of the NBP based on the NECMOD model Despite favourable labour demand conditions % Employment in the corporate sector % % % -% -% y/y (LHS) s.a. (RHS) Employment forecasts balance empl. ind. (s.a.) empl. ind. long-term average Increase of employment by sector of economy I I 9 I 1 I 11 I 1 I 13 I 1 I 1 I 1 I 17 I Services (National Economy) Services (LFS) Agriculture (National Economy) Agriculture (LFS) Industry (National Economy) Industry (LFS) Source: GUS data, NBP calculations, Quick Monitoring NBP, F-1/I-1 GUS. Employment forecasts by company size SMEs (s.a.) only up to 9 persons (s.a.) Large enterprises (s.a.) only over persons (s.a.)

29 Inflation projection of the NBP based on the NECMOD model 9... limited labour supply will lead to a slowdown in employment growth 3 Employment (y/y, %) Participation rate (%, RHS) 7 3 Change of labour force, thous. y/y Demographic structure Population Participation rate (population /+ years of age) Participation rate (population -9/ years of age) Participation rate (population - years of age) Participation rate (population 1- years of age) Labour force 3 % q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1 19q1 19q - 1q1 17q1 1q1 19q1 19q - Vacancies and difficulties with hiring employees (percentage of enterprises) 3 1 Q 7Q Q 1Q3 17Q1 17Q 17 vacancies difficulties with hiring employees Source: GUS data, NBP calculations, Quick Monitoring NBP. Unemployment rate 1% 1% 7,% %,1 % % LFS unemployment rate (s.a.) Registered unemployment rate (s.a.)

30 Inflation projection of the NBP based on the NECMOD model 3 Higher wage dynamics - - 1q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1 19q1 19q 3 1 Nominal wages (y/y) (%) Real wages (y/y) (%) Wage increases forecasts share of enterprises s.a. share of employees s.a. Source: Quick Monitoring NBP, NBP calculations Wage pressure (percentage of firms) firms with no change or increasing wage pressure 17 only firms with increasing wage pressure (RHS) Increase in wage pressure and faster wage growth than labour productivity (percentage of firms) firms with wage growth higher than productivity growth firms with increasing wage pressure

31 Inflation projection of the NBP based on the NECMOD model 31 Outline: Changes between rounds Projection External environment - Consumption demand - Investment demand - Foreign trade - Inflation Investment demand Uncertainty

32 Inflation projection of the NBP based on the NECMOD model Increase in investment since 17 GFCF enterprises GFCF housing GFCF public sector GFCF 1q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1 19q119q Private investment: Increasing use of funds from 1- EU financial perspective Improving forecasts of demand, orders and production Improving investor sentiments. Low interest rates. Capacity utilisation in the economy highest since. Public investment: Increasing use of funds from 1- EU financial perspective. Housing investment: Good labour market conditions. Low interest rates. y/y, % Source: GUS data, NBP calculations. Gross fixed capital formation

33 Q Q 3Q Q 1Q Q 3Q Q 1Q Q 3Q Q 1Q Q 3Q Q 1Q Q %, y/y %, y/y Inflation projection of the NBP based on the NECMOD model 33 Current data support the scenario of acceleration of public investment in 17, though at a rate lower than assumed in the previous round Slower pace of growth in public investment in 17 caused by low level of road investment in Q1-Q3 and lower than expected level of military equipment delivery in 17 Total public investment growth,% YoY Investment expenditures of local government units,% YoY Jul assumptions realization Nov asumptions Source: Ministry of Finance data, Eurostat, The National Road Fund, own calculations.

34 billion PLN cum. % of allocation % GDP Inflation projection of the NBP based on the NECMOD model 3 The high level of signed contracts for the use of EU funds supports the high growth of EU funds absorption over the projection horizon Slower rate of EU funds absorption from 1- perspective compared to the previous one indicates a lower utilization of EU funds in 17. Payment requests from beneficiaries PLN billion /1 9/1 1/17 Value of signed contracts for projects financed from Cohesion Policy funds, cumulative % of allocation 3 1 III VI IX XII III VI IX XII III VI IX The use of EU funds (without CAP and RDP) I-IX X-XII II year III year IV year Jul assumptions realization Nov asumptions Source: GUS, Ministry of Finance data, own calculations.

35 Source: Quick Monitoring NBP. Inflation projection of the NBP based on the NECMOD model 3 Survey among enterprises point to low demand barriers, growing optimism, Demand-side barriers QM - OPTIN - private F1 - investment y/y - private Overall investor optimism ratings (standardized index) Quarterly forecasts of demand, output and orders (s.a.) permanent demand component demand new orders output QM - OPTIN - public F1 - investment y/y - public

36 Inflation projection of the NBP based on the NECMOD model 3 further economic recovery and improvement in the forecasts of orders Industry - general economic climate indicator Construction - general economic climate indicator Industry - a portfolio of domestic and foreign orders Construction - a portfolio of domestic orders Source: GUS data

37 Inflation projection of the NBP based on the NECMOD model 37 and high capacity utilisation in the economy Capacity utilisation Uncertainty assessment QM NBP (s.a.) GUS (industry) Own uncertainty (LHS) barrier - uncertainty (RHS) Own uncertainty s.a. (LHS) Source: Quick Monitoring NBP, GUS data. Źródło: Szybki Monitoring NBP.

38 Inflation projection of the NBP based on the NECMOD model 3 Companies plan to increase investment expenditure 1 Planned changes in investment outlays 3 New investment index among sectors investment dynamics F1 (RHS) annual plans until 17 annual plans BLC Source: Quick Monitoring NBP, GUS data. quarterly plans quarterly plans BLC Planned change of investment in the quarter-on-quarter and in the current year-onyear. Balance of change, balance of large changes BLC (increase-decrease) private public average 9 private average 9 public average private average public Share of companies planning new investments in the next quarter horizon.

39 Inflation projection of the NBP based on the NECMOD model 39 Outline: Changes between rounds Projection External environment - Consumption demand - Investment demand - Foreign trade - Inflation Foreign trade Uncertainty

40 Inflation projection of the NBP based on the NECMOD model Net exports will limit GDP growth Exports: Net exports contribution (percentage points, right axis) Exports (y/y) (%) Imports (y/y) (%) High profitability of exporters (high price profitability) Expected slowdown in the euro area growth. Appreciation of the zloty exchange rate Imports: In 17 acceleration of consumption and investment dynamics. Lower growth of inventories in the second half of From 1 slower domestic demand growth q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1 19q1 19q y/y pp Net exports contribution Source: GUS data, NBP calculations.

41 Inflation projection of the NBP based on the NECMOD model 1 Changes in Polish exports 1 Changes in the volume of exports in the Visegrad Group (% y/y - national accounts) Changes in Polish exports by groups of countries (%, y/y, current prices, s.a.) Dynamics of Polish exports - national accounts (% y/y) I II III IV I II III IV I II III IV I II price changes in EUR volume changes value changes in EUR Source: CPB data, Eurostat, Quick Monitoring NBP I II III IV I II III IV I II Poland Czech Republic Slovakia Hungary Export changes of the Polish automotive industry (% y/ y, current prices) I II III IV I II III IV I II parts used vehicules cars total Euro area United Kingdom Visegrad Group 1Q 17 Q 17 non-eu countries Changes in Polish exports according to Balance of Payments statistics (% y/y, current prices) I II III IV I II III IV I II III* goods services export * data include July and August

42 Inflation projection of the NBP based on the NECMOD model Gradual appreciation of the zloty Positive current and capital account balance over the projection horizon Remittances Primary income Secondary income Goods and services Real effective exchange rate Current and capital account (% GDP) q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1 19q1 19q Source: GUS data, NBP calculations.

43 Inflation projection of the NBP based on the NECMOD model 3 Outline: Changes between rounds Projection External environment - Consumption demand - Investment demand - Foreign trade - Inflation Inflation Uncertainty

44 Inflation projection of the NBP based on the NECMOD model At the turn of 17/1 lower CPI inflation due to the base effect Base effect the influence on CPI, Food and non-alcoholic beverages Energy Core inflation CPI 1 y/y, % 17q 17q3,1 1 CPI inflation 1. (1.9) 1.9 (.1),1 Core inflation. (.). (1.), Food prices inflation 3. (3.7). (.) -,1 Energy prices inflation 3.1 (3.) 1.9 (.1) -,1 -, 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 Inflation projection of the NBP based on the NECMOD model Consumer prices dynamics gradually reaching inflation target Core inflation Energy prices Food prices CPI inflation In 17 - growth in food and energy prices supported by temporary factors. Increase in cost pressure: dynamics of unit labour costs will accelarate, 3 3 low inflation in the euro area, Over the projection horizon, stabilization of global energy commodity prices combined with the forecasted depreciation of the US dollar, the currency in which commodities are quoted. 1 1 Increase in demand pressure positive output gap (however, the sensitivity of price growth to changes in the domestic economic conditions has decreased in the recent years) -1-1 y/y, % q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1 19q1 19q CPI inflation Source: GUS data, NBP calculations.

46 Inflation projection of the NBP based on the NECMOD model In the years 1-19 the output gap will not exceed 1% of potential output TFP NAWRU Potential output Capital Economically active pop. Output gap (% potential output) GDP (y/y, %) Potential output (y/y, %) q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1-3 19q1 19q Source: GUS data, NBP calculations.

47 Inflation projection of the NBP based on the NECMOD model 7 The impact of rising cost pressure in domestic market limited by the moderate growth in import prices Wages (y/y, %) Labour productivity (y/y, %) ULC (r/r, %) - 1q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1-19q1 19q Import prices excl. oil and gas prices (y/y) (%) y/y, % Import prices (y/y) (%) q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1 19q1 19q Source: GUS data, NBP calculations.

48 Inflation projection of the NBP based on the NECMOD model Energy commodity prices after a hike in the short term will gradually decrease The index of agricultural commodity prices will stand at a low, but gradually increasing level 1. Index of energy commodity prices (USD, 11=1) VII/17 Index of agricultural commodity prices (EUR, 11=1) VII/17 1. y/y, % Energy prices inflation (y/y) (%) 1 Food prices inflation (y/y) (%) q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1 19q1 19q q1 11q1 1q1 13q1 1q1 1q1 1q1 17q1 1q1-19q1 19q Source: GUS data, NBP calculations, Bloomberg, Reuters.

49 Inflation projection of the NBP based on the NECMOD model 9 Outline: Changes between rounds Projection External environment - Consumption demand - Investment demand - Foreign trade - Inflation Uncertainty Risk factors Fan charts Uncertainty

50 Inflation projection of the NBP based on the NECMOD model Risk area Description Impact Scale of impact Deterioration of global growth outlook Decline in the US economy (household and corporate sentiment deterioration as a result of a smaller scope of reforms or a delay in their implementation, stock market correction). Sentiment deterioration and stronger economic slowdown in the euro area (stability of the financial system, uncertainty concerning Brexit agreement, disintegration tendencies, elections in Italy). Escalation of tensions on the Korean Peninsula. Inflation GDP ** Improvement in global economic conditions Higher economic growth in US (positive effect of fiscal stimulus and stronger improvement in household and corporate sentiment increasing faster growth of consumption and investment expenditure, increase in infrastructure expenditure). Higher economic growth in the euro area (higher dynamics of investment, stronger improvement in competitiveness due to structural reforms implemented in some of the member countries). Inflation GDP ** Changes in labour supply Impact of lowering of retirement age on the labour participation rate uncertain numer of people going into inactivity, depending on the labour market situation. Return migration of Poles. Scale of migration of Ukrainian citizens to Poland (incl. impact of the introduction of a visa-free regime in EU for Ukrainian citizens). Inflation GDP * Crude oil prices in the global markets Fluctuations in the oil supply in the global markets: - unknown shape of future OPEC's supply policy, - impact of the disturbance in Iraq's oil production due to the increase tensions after the independence referendum in Kurdistan. Global growth outlook, especially in the emerging Asian countries. Inflation GDP * Conclusions Inflation GDP

51 Inflation projection of the NBP based on the NECMOD model 1 CPI inflation y/y, % GDP y/y, % 9% % 3% Central path Inflation target 9% % 3% Central path q1 1q1 1q1 17q1 1q1 19q1 19q q1 1q1 1q1 17q1 1q1 19q1 19q CPI y/y, % below 1,% below,% Source: GUS data, NBP calculations. below 3,% below centr. path in the range 1,-3,% 17 % 1% 1% % 1% 1 % 9% 9% 9% 7% 19 1% % 7% 9% 9% CPI y/y, % central path % probability interval GDP y/y, % central path % probability interval

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