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 The September flood in southern Poland probably impacted the third-quarter GDP composition as household consumption slowed sharply, while a change in inventories became the main source of growth. The scale of the rebound in retail sales is insufficient to give confidence in consumption. We see slower consumption growth in 2H24 as Poles remain frugal.
 Consumption growth slowed to a crawlThe flash estimate of Poland’s GDP growth of 2.7% year-on-year in the third quarter has been confirmed. Seasonally adjusted data indicate that recovery halted between July and September (-0.1% quarter-on-quarter).The composition of GDP growth has also been published. The biggest negative surprise is the scale of the slowdown in private consumption. Household spending increased by just 0.3% YoY, compared to a 4.6% YoY increase in the second quarter. Retail sales data shows a drop in demand for goods, while overall consumption also suggests a decline in service purchases.According to a recent survey by the National Bank of Poland (NBP), consumers have increased savings as they prepare for a higher cost of living in the future and slower income growth, and remain concerned about the developments in the Russia-Ukraine conflict. These factors are particularly important for lower-income households. Slower consumption growth is also to some extent linked to higher inflation as energy prices have jumped. Along with somewhat slower growth of nominal wages, it reduced real disposable income growth. Higher energy bills have limited the funds available for other spending.The pace of public consumption also slowed – to 4.5% YoY from 11.5% YoY in the second quarter, despite high wage increases in the public sector (teachers, civil servants).
 Economic growth is being driven by a change in inventoriesDomestic demand increased by 4.4% YoY in the third quarter after 4.8% YoY growth in the second quarter of 2024, but this time mainly due to changes in inventories, which added 3.2 percentage points to annual GDP growth, becoming the main driver of economic growth.In the previous six quarters, this category had a negative contribution to GDP so the turnaround was expected, but the scale was a big surprise. The sharp slowdown in consumption growth and the jump in inventories in 3Q24 indicate a significant impact of the floods, but this does not explain all shifts in the GDP growth composition.
 Investment and exports remain weakInvestment activity remains subdued. Fixed investments were stagnant in 3Q24 (+0.1% YoY) after an increase of 3.2% YoY in the previous quarter. Data from enterprises suggest deepening declines in private investment and positive annual figures this year are mainly thanks to public investment, including military equipment purchases. In the third quarter, the latter was probably lower than in the second quarter.Foreign trade knocked off 1.5 percentage points from 3Q24 GDP annual growth. Exports fell by 0.7% YoY, while imports increased by 1.9% YoY. This reflects the fact that domestic demand is growing faster than foreign demand, driving imports and weighing on exports. Weak economic conditions in major export markets (mainly Germany and the eurozone) curb economic activity in Poland.Change in inventories was the main driver of economic growth in 3Q24%YoY, perc. points
 

Weak industry and declines in construction and trade
Gross value added increased by 2.3% YoY in 3Q24 versus 2.2% YoY in 2Q24. Slow growth in industry (1.3% YoY) was accompanied by continued declines in construction (-3.0% YoY) and deterioration in trade and repairs (-1.2% YoY), suggesting a negative impact of the floods. Improvement in transport and warehousing (+5.8% YoY) is consistent with data on changes in inventories, but may also reflect a relatively good economic situation outside the flood-affected areas.
 SummaryAfter a better-than-expected second quarter, the third quarter saw a halt in the pace of economic recovery with a surprisingly strong slowdown in consumption growth.In our view, this was temporary, and the final quarter of the year should bring further expansion of the Polish economy, but the weakness of consumption in the second half of 2024 is greater than we expected.The flood most likely had an important impact on the economy, but there were also other factors curbing consumer spending, including concerns about the future cost of living and the war in Ukraine, as well as high levels of prices. In the coming quarters, consumption is expected to improve, but unlikely to grow at the pace seen in the first half of the year.We forecast fourth-quarter growth of around 3%YoY and 2024 economic growth at 2.7%. In 2025 we expect growth to accelerate to about 3.5% due to, among other things, stronger fixed investment thanks to projects financed from EU structural funds and the Recovery and Resilience Fund. Still, there is a lot of uncertainty surrounding the scale of the rebound in fixed investment and household consumption next year.More By This Author:FX Daily: EUR/USD Enjoys Schnabel Snapback
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