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 / March

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 Changes between projection rounds Projection - Uncertainty Uncertainty

3 Inflation projection of the NBP based on the NECMOD model 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 March GDP projection compared to November projection Stronger than expected GDP dynamics in 7 due to higher contribution of net exports. p.p... Private consumption Gross capital formation GDP Collective consumption Net exports.. Higher GDP forecast for -9 Investment and inventories growth as a result of better economic conditions, elevated demand and production capacity utilization, as well as too low level of inventories... Individual consumption faster wage fund growth and positive households sentiment... Net exports limited space for further increase if we take into account high trade surplus in 7 and foreseen zloty appreciation GDP y/y, % 7 9 November 7... March... Source: GUS data, NBP calculations.

5 Inflation projection of the NBP based on the NECMOD model March CPI projection compared to November projection p.p.. Core inflation Energy prices Food prices CPI inflation. Higher food prices at the turn of 7/ due to lower availibility of some agricultural products on the domestic market. Increase in oil and fuel prices, mitigated by the appreciation of zloty against dollar... Lack of anticipated electricity prices hike in January. Weaker core inflation in 7Q and January (lower sensitivity of price dynamics to economic conditions at home and strong competition in the domestic market) Appreciation of the zloty exchange rate. Better economic conditions CPI y/y, % 7 9 November March...7 Source: GUS data, NBP calculations.

6 Inflation projection of the NBP based on the NECMOD model Changes between projections GDP y/y, % y/y, % 9% % % Nov 7 Mar CPI inflation y/y, % y/y, % 9% % % Nov 7 Mar inflation target q q q 7q q 9q 9q - - q q q 7q q 9q 9q 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 dynamics in 7H accelerated significantly, exceeding % in 7Q. 7q 7q GDP (y/y) (%).9 (.). (.) Industrial and constr. production y/y Real wage fund y/y Retail sales y/y GDP y/y (RHS) Domestic demand (y/y) (%).9 (.7). (.7) Private consumption (y/y) (%). (.7).9 (.7) Public consumption (y/y) (%).9 (.). (.) Gross fixed capital form. (y/y) (%). (.).9 (.) Exports (y/y) (%) 7. (.) 7. (.) Imports (y/y) (%).7 (7.). (.) - - Net exports contribution (p.p.). (-.). (-.) - - 9q q q q q q q q 7q7q Values from the November 7 projection are given in brackets (7q seasonally adjusted). Indicators with values higher than in the November projection are marked green, whereas indicators with lower values are marked red. Source: GUS data, NBP calculations.

9 Inflation projection of the NBP based on the NECMOD model 9 In economic growth will remain above %, and will gradually slow down in subsequent years. 7 Consumption Change in inventories GDP Gross fixed capital formation Net exports 7 Private consumption is the main factor behind GDP growth over the projection horizon due to further improvement in the labour market and very positive consumer sentiment. In the longer term, consumption dynamics decelerates in line with increasing inflation. Economic growth is driven also by positive gross fixed capital formation dynamics related to the need of rebuilding productive potential and to the inflow of EU funds under the - financial framework - - Gradual slowdown in the euro area will have a negative impact on the GDP growth at home q q 9q q q - y/y, % 7 9 GDP.... Source: GUS data, NBP calculations.

10 Inflation projection of the NBP based on the NECMOD model 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 March projection assumes higher GDP growth in Poland s most important trading partners. Better than expected current economic situation in the global economy. Tax reform in the US. More solid foundations of recovery in the euro area. Lower than anticipated scale of slowdown in China. Weak productivity growth and unfavourable demographic trends. GDP y/y, % 7 9 Euro area. (.). (.9). (.). (-) Germany. (.). (.9). (.). (-) United States. (.). (.). (.). (-) United Kingdom. (.).7 (.). (.7). (-) Source: NBP forecasts. Values from the November 7 projection are given in brackets. Indicators with values higher than in the November projection are marked green, whereas indicators with lower values are marked red. Corporate economic indicators point to the relatively high economic growth in the global economy in the short term. The global investment demand revival supports the upturn in the global trade. - 7 PMI in the global economy (LHS) IMF - the pronounced upward revision of global GDP growth forecast for Global trade in goods (p.p. dev. of y/y dynamics from the average for -7, RHS) Oct-Apr-7Oct-7 Jan- Oct-Apr-7Oct-7 Jan- Oct-Apr-7Oct-7 Jan- 7 9 Source: IMF forecasts, data: CPB Netherlands and Thomson Reuters Datastream

12 Inflation projection of the NBP based on the NECMOD model The US economic growth faster than expected Recovery in the global economy, dollar depreciation and rebound in the mining sectors s activity. Determinants of the individual consumption growth (dynamics of employment and real disposible income, wealth value) remain favourable. In 7H the US economy growth remained high (above the November projection expectations), despite negative impact of hurricanes. - 7F F 9F F Private consumption Change in inventories Net exports Source: BEA data, NBP forecasts. GFCF Public consumption GDP Relatively elevated employment growth in recent months accompanied by slightely stronger wage dynamics. 7 Employment in non-agricultural sector (m/m, thous.) - RHS Employment in non-agricultural sector (annual average, thous.) - RHS Average gross wages per hour (%, y/y) - LHS Source: BLS data, NBP calculations..... Lasting for the last few weeks correction in the stock exchange will not bear a significant impact on the GDP growth Estimated impact of the sustained drop in stock prices by % on the GDP growth in US 9 Source: estimate based on NIGEM model, NBP calculations.

13 Inflation projection of the NBP based on the NECMOD model For the years to come, economic growth in the US will be supported by the tax reform Expected effects of the tax reform: Increase in investment due to higher net income of enterprises, Consumption growth as a result of lower tax rate for most income groups, as well as favourable impact of tax reductions for companies on the assets value and wage growth outlook, Possible positive effect of the reform on the supply side in the short term (labour supply, capital accumulation, productivity), however in the longer horizon it will be offset by the adverse effects of deteriorated fiscal stance of US economy. Comparing with the model-based estimates (NIGEM), the scale of reform s impact on economic growth assumed in the projection is moderate and reflects the current cyclical position of the economy (closed output gap = weaker than average fiscal multipliers). GDP (%, y/y) NIGEM November projection March projection Private investment (%, y/y) 7 9 NIGEM November projection March projection Anticipated short-term positive effects of tax reform are reflected in high level of consumer sentiment Zaufanie Consumers konsumentów confidence (L) (LHS) Zaufanie Corporate przedsiębiorstw confidence (P) (RHS) 9 9 These anticipated positive effects were one of most important reasons standing behind the upward revision of GDP forecasts published recently by external institutions Source: BEA data, Bloomberg consensus, IMF forecasts, simulations based on the NIGEM model conducted by NBP.,9,7,,,,9,7, 7Q 7Q 7Q 7Q Q MFW IMF Bloomberg

14 Source: ECB forecasts. *Including intra-ea trade. Inflation projection of the NBP based on the NECMOD model Revival of investment and exports led to stronger economic growth outlook in the euro area In GDP growth will remain high due to: Sustained, relatively strong demand for the exports of EA countries, Upswing in investment (favourable financing conditions and enterprises expectations regarding demand, expected further public investment growth, ongoing recovery in the residential market), Further upturn in the labour market, which stabilize consumption dynamics. More favourable global economic outlook and stronger than expected rebound in demand in member countries led to upward revision of ECB forecast for EA exports dynamics*. 7F F 9F F Import dynamics of EA trade partners - Sept. 7 Import dynamics of EA trade partners - Dec. 7 EA exports - Sept. 7 EA exports - Dec In EA, firms point to relatively high level of capacity utilisation and growing barriers related to insufficient level of productive capital which should support investment growth Investment in machinery and equipment (%, y/y, RHS) Capacity utilisation (standardized values, LHS) Equipment constraints* (standardized values, LHS) Source: Data of Eurostat and EC, NBP calculations. *Production constraints according to the assessment of industrrial companies Probably elevated employment growth will not continue next year due to increasing labour supply barriers in some countries. However wage growth should remain on the moderate upward trend Employment (%, y/y) Source: Eurostat data, NBP calculations. Nominal wages (%, y/y)

15 Inflation projection of the NBP based on the NECMOD model In the medium term, the GDP growth in the euro area is expected to decelerate Since 9 GDP dynamics will slow down reflecting a gradual decline in cyclical recovery, with low forecast of potential output growth in the euro area, related to unfavourable demographic trends and weak productivity growth. Since 9 GDP growth will be lowered mainly by weakening contribution of private consumption and investment to growth. - 7F F 9F F Collective consumption GFCF Net exports Source: Eurostat data, NBP forecasts and calculations Private consumption Change in inventories GDP Despite very favourable employment rate forecast, in the medium term consumption and investment growth will be hampered by decreasing labour supply F F 9F F F F Number of economically active people (LHS, %, y/y) Employment rate (RHS) Source: forecasts of European Commission, NBP calculations Long-lasting weak productivity growth in the euro area makes the scenario of economic slowdown more probable in the medium horizon - - Total factor productivity in the member states of the euro area (%, y/y) F Median Minimum Maximum Source: forecasts of European Commission, NBP calculations.

16 Source: NBP forecasts. Inflation projection of the NBP based on the NECMOD model Short-term economic outlook growth for BRIC countries supported by global economy recovery China: Expected controlled economic slowdown as a result of moderate weakening of residential and infrastructure investment. It will be partly offset by relatively strong economic growth in the global economy (in the short term) and eventual stabilizing policy of the government (if needed). Russia: Economic upturn supported by favourable outlook in the external environment, lower interest rates and low inflation. GDP growth will remain rather weak due to structural problems and imposed sanctions. Brazil: Modest economic growth as compared with the historical level will be backed by: relatively low inflation and interest rates cuts, as well as favourable economic outlook in the external environment. GDP growth will be hampered by sustained elevated political and fiscal risk GDP growth forecast (%) GDP growth forecast (%) GDP growth forecast (%) Nov Mar Nov Mar Nov Mar 7 9 China Nov Mar Nov Mar Nov Mar 7 9 Russia Nov Mar Nov Mar Nov Mar 7 9 Brazil

17 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 Consumption demand Uncertainty

18 Inflation projection of the NBP based on the NECMOD model Consumption demand as the main driver of GDP growth in the projection Private consumption: Favourable labour market conditions. y/y, % Public consumption (y/y, %) Private consumption (y/y, %) Optimistic consumer sentiment. 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 of other units of the sector ( Budget Act), including further wage freeze of part of the government sector workers in. Lack of detailed information on the continuation of cutting public expenditure in q q q q q q 7q q 9q qq y/y, % 7 9 Private consumption Public consumption Source: GUS data, NBP calculations.

19 Inflation projection of the NBP based on the NECMOD model 9 Favourable financial situation of households Further decline in unemployment rate and acceleration of wage growth are expected, although the purchasing power of households will be reduced by rising inflation. Disposable income decomposition (constant prices) (y/y, %) Net transfers and taxes excl. plus plus Wage fund Property income Operating surplus Disposable income (y/y, %) y/y, % Private consumption (y/y, %) Disposible income (constant prices) (y/y) (%) q q q q q q 7q q 9q q q - 7q q 9q q q - Source: GUS data, NBP calculations, Eurostat.

20 Inflation projection of the NBP based on the NECMOD model Consumption is driven by favourable consumer sentiment and very good labour market conditions Financial situation of households 7q 7q ULC (y/y, %).9 (.). (.) Labour productivity (y/y,%). (.). (.) Gross wages (y/y, %).9 (.) 7. (.) Feb/ Aug/ Feb/ Aug/ Feb/ Aug/ Feb/7 Aug/7 Current financial situation of households Financial situation of households in the next months Employment LFS (y/y, %). (.). (.) Unemployment rate LFS (%). (.). (.) Participation rate (%). (.7). (.) Fear of being unemployed Values from the November 7 projection are given in brackets. Indicators with values higher than in the November projection are marked green, whereas indicators with lower values are marked red. Source: GUS data, NBP calculations. - - Feb/ Aug/ Feb/ Aug/ Feb/ Aug/ Feb/7 Aug/7

21 Inflation projection of the NBP based on the NECMOD model The number of vacancies breakes records, however the probability of finding an appropriate employee among unemployed declined Number of vacancies within a month (s.a., LHS) Number of non-subsidized vacancies within a month (s.a., LHS) inverse of labour market indicator (BIEC, RHS) Jan-7 Jan-9 Jan- Jan- Jan- Jan-7 Since the number of vacancies is surging rapidly. In mid-7 its growth slightely decelerated however in the second half of 7 it boosted again. Lower dynamics of the number of vacancies coincided with the marked slump in the probability of finding a job by unemployed. At the same time the probability of finding a work by inactive person is increasing. It suggests that companies more often choose an alternative to looking for candidates from unemployed. Source: GUS data, NBP calculations. 9 7 Probabilities of flows between employment (E) and unemployment (U) % % % % U->E (s.a., LHS) E->U (s.a., RHS) % 9 7 Flows to and from inactivity (N) (number of people in thous. per quarter) E->N U->N N->E N->U 9 7.%.%.%.%.%.%

22 Inflation projection of the NBP based on the NECMOD model Factors driving changes in labour force participation rate Labour force participation rate and its changes / /+ 9 7 Before the increase in retirement age, participation rate of pre-retirement and retirement people raised both because of old regulations, very favourable situation in the labour market, as well as mounting participation rate of next generations of elderly people. Zmiana YoY change, r/r I kwartal Q Zmiana YoY change, r/r III kwartał Q Poziom Level, Q IV (RHS) kwartał Zmiana YoY change, r/r II kwartał Q Zmiana YoY change, r/r IV Q kwartał Source : GUS data (LFS), NBP calculations.

23 Inflation projection of the NBP based on the NECMOD model The impact of lowering of the retirement age in 7Q close to November 7 projection expectations Number of retirees and pensioners (in thous.) 9 9 Applications for retirement in 7Q thous. % Total number of people aged /, Q Q Q Q Q November 7 projection, NECMOD March projection, NECMOD GUS data not adjusted for compensiotions of benefits Projection without lowering of the retirement age (.) Very favourable situation in the labour market led to decelerated growth of retirees, which should have taken place due to demographic changes even without taking into account the decrease of retirement age. Source: GUS and ZUS data, NBP calculations. Submitted applications for retirement, including:, Granted pensions, Rejected applications, Pensions granted and suspanded, Still examined applications 9, No application submitted 9, Applications submitted by currently employed Applications submitted by currently unemployed, registered in Labour Office 7,9, 9,7,7 Significant percentage of persons entitled for retirement after..7 decided to instantly suspend their pension or come back to work and benefit from the pension at the same time (in 7 the number of retirees who are working grew by 9, thous. y-y, compared to, thous. in )

24 Thousands Thousands Inflation projection of the NBP based on the NECMOD model Immigration from Ukraine increasing scale, however slightely lower growth 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 7 % % % % % % Changes in the statemants structure % % % % % % % % % 7% % % % 7% % % 9% % % % % % % % 7% % % 7% 7 agriculture industry construction services Data for 7 indicate, that Poland issued almost thous. work permits for foreigners and registered thous. employers declarations that form a basis for applying for a visa. Only less than % registrations were finalized with the residence visa ( double declarations). The upward path of immigration confirmed by data on border traffic with Ukraine. Source: data of Border Guard, Ministry of Family, Labour and Social Policy, NBP calculations. 7 % % % % % % % % % % % % % % % 9% % % % % 9% % Pronounced changes in the structure of workplaces by sectors for immigrants in -7. Most of current immigrants work in services, however the industry is gaining more importance. Civil contracts are the most widespread, although labour contracts are more and more frequent in sectors characterised by smaller grey economy than agriculture or construction. % % % % % 7 Labour contract Civil contract Contracts Other

25 thous. Inflation projection of the NBP based on the NECMOD model Decelerated growth of the number of visa issued due to changes in their structure Visa and residence allowances granted to Ukrainians Schengen visas (<M) National visas (>M) Temporary residence permits Permanent residence permits Visas issued for work / self empl., Pole's Cards, res. permits 7 Since th of June 7 Ukrainian citizens don t have to apply for a visa for short-term tourist visit however it does not mean lifting the restrictions related to undertaking legal employment in the EU 7 9 work - declarations M work - other own business the Pole's Card cultural activity visit tourism other Structure of visas granted to Ukrainians (by purpose of the visit).%.7%.9%.7%.% 7.%.%.%.7%.%.%.%.%.%.%.% though it impacted on the structure of issued visas, with significantly lower share of short-term visa (<M) which are often related to no-employment visits (e.g. shopping). Both changes in visa structure, as well as residence documents imply moving gradually to long-term immigration..%.%.%.%.%.%.% 7.% Source: Ministry of Foreign Affairs data, NBP calculations.

26 Inflation projection of the NBP based on the NECMOD model Limited labour supply will lead to a slowdown in employment growth Employment (y/y, %) Participation rate (%, RHS) 7 Changes in 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 - years of age) Labour force q q q q q q 7q q 9q q q - 7q q 9q q q - 9 Percentage of companies reporting difficulties with finding new employees as a barrier for expansion 9 Unemployment rate (in %) Source: GUS data, NBP calculations, NBP Quick Monitoring. LFS unemployment rate (s.a.) Registered unemployment rate (s.a.)

27 In 7H higher wage dynamics Inflation projection of the NBP based on the NECMOD model 7 % 7% % % % % % % Annual growth of nominal wages (in %) % 7 Annual growth of real wages against labour productivity (in %) % % % % Public sector Total Private sector Corporate sector Real wages in National Economy Labour productivity The impact of revisions (of companies) on the initial data % from the corporate sector 7 Revised data GUS quarterly data I II III IV I II III IV I II III IV I II III IV I II III IV 7 Persistent increase in nominal wages dynamics, mainly in the private sector of the economy. Upward trend in labour productivity growth. Revised data from the corporate sector indicate that the growth in wages was observed mainly in 7H % -% 7 Source: GUS data, NBP calculations.

28 Inflation projection of the NBP based on the NECMOD model High wage dynamics also in the projection horizon. - - q q q q q q 7q q 9q q q Nominal wages (y/y, %) Real wages (y/y, %) Wage increases forecasts share of enterprises (s.a.) share of employees (s.a.) Source: NBP Quick Monitoring, NBP calculations. Wage pressure (percentage of firms) 7 Increase in wage pressure and faster growth of wages than of labour productivity (percentage of firms) Total wage pressure (LHS) in which, increase in wage pressure (RHS) 9 7 firms with wage growth faster than labour productivity growth firms with increasing wage pressure

29 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 Investment demand Uncertainty

30 Inflation projection of the NBP based on the NECMOD model Increase in investment since 7 GFCF enterprises GFCF housing q q q q q q 7q q 9q qq Source: GUS data, NBP calculations. GFCF public sector GFCF Private investment: Increasing use of funds from - EU financial perspective. Improving forecasts for demand, orders and production. Improving investor sentiment. Low interest rates. Favourable profitability and financial liquidity of enterprises. Capacity utilisation in the economy highest since. Public investment: Increasing use of funds from - EU financial perspective. Housing investment: Good labour market conditions. Low interest rates. Implementation or planned changes in regulations (e.g. termination of the Flat for the Young government scheme in ) y/y, % 7 9 Gross fixed capital formation....

31 Inflation projection of the NBP based on the NECMOD model Survey among enterprises point to low demand barriers, high capacity utilisation and growing shortages of stocks Contribution of sectors to the investment growth (in p.p.) Construction Energy Mining Trade Industry Transport Services Water Percentage of firms declaring that production capacity utilization is close to the maximum (%) Construction Trade Industry Transport Services Source: F, NBP Quick Monitoring, NBP calculations Capacity utilisation and percentage of firms declaring demand as a barrier for expansion (w %) Capacity utilization (LHS) Demand barrier Indicator of stok shortages (balance of answers: too small stocks too big stocks, in p.p.) Final products Goods

32 Source: GUS data, NBP Quick Monitoring, NBP calculations.. Inflation projection of the NBP based on the NECMOD model and improving business sentiment, expected increase in demand and production General business sentiment (OPTIN synthetic indicator, in %) - 7 OPTIN s.a. Corporate investment y/y (RHS) Cyclical decomposition of investment growth (y/y, constant prices, in %) trend cyclical component irregular component seasonal component Quarterly forecast of demand and production (s.a.) Demand Production In 7Q, for the first time since long, there was a positive contribution of cyclical component to the investment growth.

33 Inflation projection of the NBP based on the NECMOD model Companies plan to increase investment outlays. Percentage of firms declaring to start investment within a quarter and in the current year (s.a., in %) Planned annual change in investment outlays 7 Private - quarterly plans Public - quarterly plans Private - annual plans Public - annual plans sectors with substantial use of EU funds F - investment y/y other sectors F - investment y/y Source: NBP Quick Monitoring, GUS data.

34 realization realization realization realization Nov 7 Mar Nov 7 Mar Nov 7 Mar Mar Inflation projection of the NBP based on the NECMOD model Recovery in public investment which started in 7 will continue in the following years Increase in public investment dynamics in 7 was mostly due to the upswing in investment outlays of local government units. Contributions to the investment growth, % y/y Public investment, bn PLN F Local gov. units Other Public investment 7F F 9F F country EU F NBP forecast Source: Eurostat data, Ministry of Finance data, calculations NBP

35 7 9 Inflation projection of the NBP based on the NECMOD model In all key General Government entities plan substantial investment growth Investment expenditures of local government units, % GDP Road investment outlays (National Road Fund), bn PLN Railway investment outlays (PKP PLK), bn PLN NBP plan realization plan IV I 7 I planned tenders in progress in realization finished Despite the substantial number of agreements signed, the probability of delays in realization is increasing due to difficulties with finding subcontractors able to finish projects within the given budget and the extension of the design phase whereby more projects are carried out as Design and Construction projects in the current EU financial framework in comparison to the previous one. Source: data of GUS, MF, MI, PKP PLK; NBP calculations

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

37 Inflation projection of the NBP based on the NECMOD model 7 Net exports will limit GDP growth Exports: Net exports contribution (p.p.,rhs) Exports (y/y) (%) Imports (y/y) (%) High profitability of exporters (substantial price profitability). Expected slowdown in the euro area growth. Appreciation of the zloty exchange rate. Imports: W acceleration of investment dynamics. - - In the longer horizon slower domestic growth rate q q q q q q 7q q 9q q q y/y p.p. 7 Net exports contribution to growth Source: GUS data, NBP calculations.

38 Inflation projection of the NBP based on the NECMOD model Second year in a row record high current account balance Current account balance of goods and services (balance of payments statistics), in % GDP Goods Services Total Source: Balance of payments statistics NBP, Eurostat, GUS, NBP Quick Monitoring Changes in exports (balance of payments statistics) (% y/y; current prices) Goods Services Total Exports I II III IV I II III IV I II III IV 7 The value of euro echange rate which makes exports and imports unprofitable and the actual euro echange rate (in PLN) exchange rate for profitable exports +/-, std.dev. actual euro exchange rate exchange rate for profitable imports +/-, std.dev. - Geographical structure of changes in Polish exports volume (% y/y; constant prices) - non-eu countries other EU countries EA I II III IV I II III IV I II III 7 Changes in Polish imports of goods - product structure (% y/y; current prices) Industrial goods classified mainly by raw material Chemicals and related products Mineral fuels, lubricants and related materials Machines, equipment and transport equipment Other SITC sections Total I II III IV I II III IV I II III IV 7

39 Inflation projection of the NBP based on the NECMOD model 9 Gradual appreciation of the zloty, getting the effective exchange rate closer to the equilibrium exchange rate Positive current and capital account balance in the projection horizon Remittances Primary income. Real effective exchange rate. Secondary income Current and capital account (% GDP) Goods and services q q q q q q 7q q 9q q q Source: GUS data, NBP calculations.

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

41 Inflation projection of the NBP based on the NECMOD model At the end of 7 inflation increased by higher food prices related to scarce availibility of some agricultural commodities and products CPI decomposition (contribution in p.p., monthly data) y/y, % 7q Food and non-alcoholic beverages Energy Core inflation CPI CPI inflation. (.) Core inflation.9 (.) Food prices inflation Energy prices inflation. (.). (.) Values from the November 7 projection are given in brackets (seasonally adjusted). Indicators with values higher than in the November projection are marked green, whereas indicators with lower values are marked red. Source: GUS data, NBP calculations.

42 Inflation projection of the NBP based on the NECMOD model In the projection horizon CPI inflation will gradually pick up to reach around % y/y in 9- Core inflation Energy prices Food prices CPI inflation In gradual fading of temporary factors boosting food price inflation Changes in cost pressure: acceleration of unit labour costs, relatively low inflation in the euro area, zloty exchange rate appreciation slump in global energy commodity prices. - - Increase in demand pressure positive and widening output gap (however, the sensitivity of price growth to changes in the domestic economic conditions has decreased in the recent years) - - q q q q q q 7q q 9q q q y/y, % 7 9 Source: GUS data, NBP calculations. CPI inflation...7.

43 Inflation projection of the NBP based on the NECMOD model In gradual fading of supply factors boosting food prices. Decomposition of food and non-alcoholic beverages prices, in p.p. y/y, % Food prices inflation (y/y) (%) Other (fish, bread, confectionary, beverages) Meat Fruit, vegetables Milk, cheese and eggs Oil and fats Food and non-alcoholic beverages q q q q q q 7q q 9q q q Source: GUS data, NBP calculations.

44 Inflation projection of the NBP based on the NECMOD model Output gap, which was negative since, closed in 7H. In the following years the positive output gap will widen to reach.% of potential GDP at the end of the horizon. TFP NAWRU Potential output Capital Economically active pop. Output gap (% potential output) GDP (y/y, %) Potential output (y/y, %) q q q q q q 7q q 9q - q q Source: GUS data, NBP calculations.

45 Inflation projection of the NBP based on the NECMOD model Unit labour cost growth will accelerate to exceed % y/y in -. High cost pressure at home will be limited by moderate import prices dynamics Nominal wages (y/y, %) Labour productivity (y/y, %) ULC (y/y, %) - q q q q q q 7q q 9q - q q Import prices excl. oil and gas prices (y/y) (%) y/y, % Import prices (y/y) (%) q q q q q q 7q q 9q q q Source: GUS data, NBP calculations.

46 Inflation projection of the NBP based on the NECMOD model Oil prices expected to levell off Brent oil prices (USD/b) 7 7 daily monthly average notowania dzienne średnia w miesiącu średnia w kwartale Source: US Department of Energy, Bloomberg, OPEC. quarterly average Market oil inventories in US (mln b) 7 inventories zapasy średnia -year z average poprzednich pięciu lat WTI oil prices and the number of active drills in US 7 cena WTI ropy oil WTI prices (przesunięta (shifted o by cztery months) miesiące) liczba Number aktywnych of active wiertni drills (P) (RHS) Global production, consumption and changes in inventories of crude oil (mln b/d) Change zmiana zapasów in inv. (P) (R) światowa Global supply podaż (L) (L) Global światowy demand popyt (L) (L) Forecasts of crude oil extraction in US (mln b/d) Oil wydobycie extraction ropy w USA in US prognoza EIA forecast EIA z X 7 prognoza Forecast z II (.) (7.)

47 Inflation projection of the NBP based on the NECMOD model 7 Global energy commodity prices, after hikes observed in recent months, will gradually slow down.. Index of energy commodity prices (USD, =) Oil prices (RHS) y/y, % Energy prices inflation (y/y) (%) q q q q q q 7q q 9q q q q q q q q q 7q q 9q - q q Source: data: GUS, Bloomberg, Reuters,; NBP calculations.

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

49 Inflation projection of the NBP based on the NECMOD model 9 Risk area Description Impact Scale of impact Deterioration of global growth outlook Decline in US economy (stock market correction limiting private consumption due to low savings rate of households and substantial share of financial assets in their wealth, still low productivity growth while investment dynamics remain subdued). Sentiment deterioration and stronger economic slowdown in the euro area (future correction in the housing market, uncertainty concerning Brexit agreement). Retarding integration processes in the global economy. Inflation GDP ** Improvement in global economic conditions Higher economic growth in US (stronger positive impact of fiscal stimulus on individual consumption and private investment, more favourable supply conditions milder than expected slump in the US potential output after the financial crises). 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. Further growth of labour force participation rate in the age group of -9/. 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, - Ucertainty related to the outlook for shale oil supply in the US (short production history of current shale plants and dynamic improvement of drilling technology). Crude oil demand from emerging Asian economies. Inflation GDP * Conclusions Inflation GDP

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

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