Macroeconomic factors in 2014

According to the forecasts prepared by PZU, GDP growth in Poland should exceed 3% in 2014. After two years of stagnation, domestic demand will increase. This improvement should also be noticeable in the insurance sector.

A relatively moderate increase in inflation will help sustain the increasing purchasing power of households, even with a modest increase in nominal salary growth. The real increase in household income, with the improvement of the situation on the labor market, should contribute to the acceleration of the rate of consumption in 2014 to over 2.5%.

In the light of the recovering domestic demand and good export prospects, companies should increase capital expenditure. It is expected that public investments using funding from the European Union will also start in the second half of 2014.

The outlook of moderate, gradually increasing inflation and the relatively calm increase in the growth rate probably means that the MPC will start to raise interest rates no earlier than at the end of this year. The maintenance of low interest rates and the acceleration of the growth rate can promote a recovery in loans and support demand for capital goods.

The risk factor for the fiscal policy and, consequently, for the whole economy is the decision on the matter of compliance of the changes in the pension system with the Constitution. As a result of these changes, all treasury bonds held by Open-ended Pension Funds were transferred to the Social Insurance Institution on 4 February 2014.               

This enabled their redemption and, consequently, the reduction in the state’s public debt by approximately PLN 130 bn. 

If the Constitutional Tribunal rules that these changes are inconsistent with the Constitution to a significant extent, the reduction in public debt arising from the redemption of the treasury bonds transferred by the OFE to ZUS could prove ineffective. In this situation, the government may be required to take steps to increase the restrictiveness of fiscal policy.

Simultaneously, the changes in the OFE are a source of uncertainty for the financial markets in Poland. They can result in an increase in volatility. The risk for the stock market is the question of how many Poles will decide to remain with the OFE. The scale of the potential reduction in demand for shares from pension funds, which are a major player on this market, depends on this.

The process of standardization of monetary policy in the US could promote the outflow of capital from “emerging markets” in 2014 and, consequently, may cause disturbances on the financial markets of these countries. The most dynamic and financially stable economies – which include Poland – will have a chance of avoiding such problems. Even so, it seems inevitable that bond yields will rise over the coming two years, while the volatility of prices on the Polish financial market can intensify periodically.

The events in Ukraine may also exert an impact on the Polish economy, and thereby on the insurance sector. We assume that the conflict between Ukraine and Russia will not go beyond the diplomatic and political sphere, though it may prove to be lengthy.

One must reckon with a profound recession in Ukraine as a consequence of recent social unrest, the weakness of government structures, possible restrictions imposed by Russia and the implementation of a program of necessary reforms. The withdrawal of capital, the depreciation of the ruble and more stringent monetary policy may also decelerate economic growth in Russia.  Nevertheless, the direct impact exerted by these factors on Polish economic growth should be limited.

However, it is not possible to rule out a scenario in which the conflict will become harsher and economic sanctions will be placed on Russia, which could lead to stifling Poland’s exports to this country, or disruptions to the supplies of energy commodities. If Polish food is denied access to the Russian market, this may foster low inflation in Poland. If the conflict grows harsher or Ukraine loses financial liquidity, this could also contribute to unfavorable price movements on the Polish financial market. 

Improvement in the condition of the Polish economy should also be noticeable in the insurance sector.

Forecasts for the Polish economy

Real GDP growth in % (y/y) 3.40 1.60 2.00 4.50 3.90
Increase in individual consumption in % (y/y) 2.80 0.80 1.30 2.60 3.20
Increase in gross expenditure on fixed assets in % (y/y) 5.20 (0.20) (1.60) 8.50 (0.40)
Price increases in % (y/y, end of the year) 1.60 0.70 2.40 4.60 3.10
Increase in nominal salaries in the national economy in % (y/y) 4.10 3.40 3.70 5.60 3.90
Rate of unemployment in % (end of the year) 12.60 13.40 13.40 12.50 12.40
NBP base rate in % (end of the year) 2.50 2.50 4.25 4.50 3.50
Annual average EUR/PLN exchange rate 4.17 4.20 4.19 4.12 3.99
Annual average USD/PLN exchange rate 3.10 3.16 3.26 2.96 3.02

* Forecast of March 2014
Source: PZU Macroeconomic Analysis Bureau