Even those still employed are hesitant to spend despite wage growth. Average wages continue to rise by over 10% year-on-year, but retail sales fell by 3%—the sharpest decline since the pandemic, puzzling economists. Possible explanations include a higher savings rate as households brace for challenging times, the impact of recent floods on retail activity, and potential issues with data collection by the Central Statistical Office.
Another theory is a shift in consumer spending from goods to services in September, though why this would occur now remains unclear. Because no single explanation is sufficient, economists believe a combination of factors may be responsible. This broader slowdown in economic growth has led some banks to revise their forecasts downward. ING Bank economists estimate that Poland’s GDP grew by 2.8% in the third quarter, while mBank forecasts only a 2.5% rise, compared to over 3% growth in the previous quarter.
The outlook for Poland’s financial markets is equally subdued, largely due to factors beyond the country’s borders. Polish stocks, bonds and currency are losing value in what analysts refer to as “Trump trades”—market movements driven by the possibility of Donald Trump winning the upcoming U.S. presidential election. Although U.S. polls show the race is too close to call between Trump and Kamala Harris, investors anticipate increased geopolitical risks for Central Europe if Trump reduces U.S. military and financial support for Ukraine. Further, Trump is expected to push for tariffs on imports from the European Union, a move that could hurt Polish exporters.
Consequently, the Polish złoty has weakened, with the dollar rising by 0.06 złoty over the past week and over 0.20 złoty in the past month. This brings the dollar above 4.00 złoty for the first time since late June. Additionally, the WIG20, Poland’s main stock index, dropped by 2.5% last week, reaching its lowest level in nearly three months. Similar pressures are also weighing on other Central European currencies, with the Czech koruna and Hungarian forint both declining. The dollar has reached its highest value against the Czech koruna since August and against the Hungarian forint since October of last year.
These trends underscore the challenges facing Poland's economy and financial markets amidst both domestic and international pressure.
Bonding together?
The worsening financial market conditions are affecting government bond performance, with prices declining and yields subsequently rising. This yield increase means higher debt servicing costs for the state if it issues new bonds under current conditions. Since the beginning of the month, yields on Polish 10-year bonds have increased by 0.6 percentage points, from 5.25% to 5.85%. Similarly, Czech bonds rose from 3.66% to 4.06%, and Hungarian bonds saw an increase from 6.21% to 6.88%.
The tense market situation led to an underwhelming auction of new debt in Warsaw on Wednesday. The finance minister initially planned to sell 12 billion złoty (€2.6 billion) in bonds to banks but reduced the amount to 11 billion złoty (€2.4 billion) days before the auction, likely due to unfavorable market conditions. During the auction, demand only reached 9.7 billion złoty (€2.1 billion), and the ministry managed to sell just 8.6 billion złoty (€1.8 billion) in bonds, marking the first shortfall in demand since April. Such occurrences are rare, with previous shortfalls happening twice in 2022 (soon after the Russian invasion of Ukraine), twice in 2023, and twice again this year across 19 auctions.
Meanwhile, inflation in Russia is spiraling again, prompting the central bank to act with an aggressive rate hike to 21%, a level not seen even during 2022’s post-invasion financial crisis when rate increases were used to stabilize the ruble. This time, however, the inflation driver is domestic demand, which surged to 9.8% in September, up from 7.5%. The central bank attributes this rise to two key factors: robust market demand from Russian consumers fueled by the government's loose fiscal policy, which includes wage increases and a range of benefits aimed at maintaining public support, and supply chain constraints worsened by labor shortages and international sanctions limiting production capacity.
Despite these supply-side limitations, inflation remains unaffected by the recent economic slowdown. The central bank expects that, following the rate hike, inflation may stabilize but remain above 8% until year’s end. The only effective measure to lower inflation further would be to reduce household demand, effectively worsening their economic outlook. However, achieving this remains difficult while the government maintains its accommodative fiscal stance. Consequently, the Bank of Russia has suggested that additional rate hikes may be necessary in the coming months if inflationary pressures persist.
Some light at the end of the tunnel
Economic conditions in Germany are starting to show signs of recovery. The latest forecasts from Germany’s Bundesbank project a small but meaningful GDP growth of 0.1% in Q4, marking a turnaround after a half-year contraction. This improvement is reflected in rising Purchasing Managers’ Index (PMI) scores for both manufacturing and services. While the manufacturing PMI remains below 50 points (indicating contraction), it has risen to its highest level since July, suggesting a slowdown in economic decline. Meanwhile, the services PMI has reached a three-month high, indicating growth in that sector.
Further boosting sentiment is Germany’s IFO Business Climate Index, which rose slightly for the first time since April, signaling improved confidence among German businesses, particularly in IT, tourism and logistics. While the industrial sector continues to struggle, there is optimism that it may stabilize in the coming months. The European Central Bank’s recent interest rate cuts, part of its efforts to stimulate eurozone growth, may already be positively influencing Germany’s economy and business outlook.
End of an era: Czech Airlines makes its final landing
Meanwhile, the Czech Republic saw the end of its historic national airline, Czech Airlines, which completed its final flight on Saturday. The airline, which celebrated its 100th anniversary last year, was the world’s fifth airline at its founding and the third in Europe, following KLM and Soviet Aeroflot. After its 2015 privatisation, Korean Air and Czech low-cost airline Travel Service, now known as Smartwings, became its main shareholders. Korean Air exited in 2017, leaving Smartwings with a 97% stake. Under Smartwings, Czech Airlines gradually ceased international operations, maintaining only one route between Prague and Paris in recent months. Smartwings, owned by Czech entrepreneurs Jiří Šimáně and Roman Vik, will take over all operations, retaining the Czech Airlines branding on two remaining aircraft.
Smartwings, with a fleet of 37 Boeing aircraft and two Airbuses, is a major player in Central European charter and commercial aviation, operating in Poland, Slovakia, and Hungary and offering private flights with five Cessna planes.
