Economic outlook

The European Commission’s economic sentiment index for Poland and Germany has shown significant divergence this year. While Poland is experiencing growth and heading towards expansion, Germany is moving towards a recession. The economic situation in Germany and the north-western part of the EU raises questions about whether it will lead to a slowdown in growth in Poland, Central Europe, and the southern eurozone.

The European Commission’s economic sentiment index, comprising industry, construction, services, retail trade, and consumer confidence, has indicated disparities between Germany and Poland since the beginning of 2023. Manufacturing and trading companies in Germany have been dealing with excess inventories, leading to a gradual reduction in demand for industrial goods. This inventory reduction has lowered economic sentiment in German industry by over 10%, below this year’s level. In contrast, Polish industry has shown resilience and has performed close to the post-pandemic average.

Worsening sentiments persist in construction and industry in Germany due to higher interest rates discouraging credit uptake and reducing demand. In Poland, construction continues to be supported by government subsidies for mortgage loans. Consumer sentiments in Poland have risen again, surpassing the post-pandemic average since April. This improvement is evident in national data, including retail sales growth, supported by rising wages that have outpaced inflation.

The global economic downturn, influenced by weak recovery in China, inflation affecting real incomes, the post-pandemic shift from goods to services, and deglobalization, has led to a decline in worldwide orders in industrial processing. However, Poland’s production seems to be maintaining a new, higher trend, significantly above pre-pandemic norms. Nearshoring production to nearby countries may be contributing to this trend.

With improving economic sentiments in Poland, most sub-sectors in industrial processing have seen positive changes. However, the exposure to Germany as a primary trading partner is pulling Polish companies in the opposite direction. The study has examined 21 sub-sectors in industrial processing, comparing the change in 28 business trend indicators from October 2022 to October 2023 with sectoral exposure to the German economy, expressed as the share of companies controlled by German investors. The findings suggest that less exposure to the German economy corresponds to a more significant improvement in economic conditions. Companies linked to German capital express serious concerns about their future, overall economic situation, production, and domestic and foreign orders.

Despite the recession in Germany slowing down this year’s growth, most economies in Central Europe are expected to avoid a recession. The Deloitte consensus of market and institutional forecasts indicates a 0.7% slowdown in growth in Central Europe this year (with expected declines in Estonia and Hungary), contributing to faster deflation. October forecasts from the International Monetary Fund suggest that only Croatia will surpass pre-pandemic expectations for growth this year (by 2.9%), with Poland falling 0.5% below and the Czech Republic remaining 10% below. According to the consensus, the growth rebound in 2024 will be mild, partly due to the restrictive monetary policy in the eurozone. The average growth in Central Europe will be 2.5% (ranging from 2.0% in Lithuania and Latvia to 3.4% in Romania), with continued elevated inflation at 4.3% (from 2.8% in Latvia to 6.1% in Poland). Significant uncertainty remains regarding the exchange rates of the złoty and forint, evident in the wide range of forecasts for these currencies.  

Experts

Julia Patorska, Aleksander Łaszka, and Rafał Trzeciakowski, Deloitte