Economic Analysis - Strong Wage Growth Supporting Consumer Outlook - 24 JULY 2017


BMI View: R eal wage growth in Poland will remain strong on th e back of a tight labour market, low inflation , and solid growth of investment and productivity . In combination with a record high employment rate , the outlook for household consumption growth is particularly strong in 2017-18.

Poland's economy is firing on all cylinders, and our real GDP growth forecast of 4.1% in 2017 and 3.6% in 2018 is well above Bloomberg consensus. Economic sentiment in the economy rose to a six-year high in early 2017, suggesting that businesses and households are increasingly optimistic on present and future prospects. Household consumption will remain a main pillar of the economic expansion, contributing 2.1 percentage points (pp) in 2017 and 1.8pp in 2018 to the headline GDP growth figure. Our upbeat view on consumer spending was reinforced by June consumer data showing real wage growth of 4.7% y-o-y, driven by strong nominal wage growth of 6.0% and a slowdown in headline inflation to just 1.3% in the same month.

Strong Consumption Growth On The Cards
Poland - Nominal Wages & Inflation
Source: Bloomberg, BMI

The Polish economy will continue to benefit from a cyclical upswing across the eurozone and strong external demand. In combination with robust domestic demand, this will continue to put pressure on the labour market, which is already extremely tight. Poland's unemployment rate fell to a historic low of 4.8% in May and the total number of occupied jobs climbed to a record high of 16.1mn, despite Poland's declining population. Employment growth of 4.5% y-o-y in H117 was the strongest expansion since H108. In the meantime, the number of job vacancies surged to nearly 120,000 in Q117, suggesting that firms are having difficulties in filling open positions with qualified labour. This will continue to exert upward pressure on wages in the coming quarters.

Labour Market Tightening
Poland - Job Vacancies & Occupied Jobs
Source: Eurostat, BMI

With the economy approaching full employment and real wages boosted by low inflation, Poland's consumer confidence indicator rose to an all-time high in June. This shows that households have an increasingly positive view on their current and future financial standings, which will support private consumption growth in 2017-18. This dynamic is already under way, with retail sales growth on a steep upward trajectory since early 2016, accelerating to 7.3% y-o-y on average in the first five months of 2017. A robust outlook for the Polish consumer is on display in the MSCI Consumer Discretionary Index, which recently broke above long-term resistance ( see chart below).

Bullish Outlook For Consumer-Focused Stocks
Poland - MSCI Consumer Discretionary Index & Consumer Confidence Index - Next 12 Months (RHS)
Source: Bloomberg, BMI

We note that strong wage growth has not negatively impacted profitability of Polish firms. This is reflected in Poland's benchmark WIG20 and mid-cap Mid-WIG equity indices, in which profit margins have improved significantly in recent quarters, during which time both have seen impressive rallies. With fixed investment and productivity also expanding at a healthy clip ( see 'Strong Rebound On The Cards' July 11), fundamental factors are for now supporting higher real wages.