Looking Through Rose-Coloured Glasses

Polish Economy and Financial Markets.

In October's MACROscope:

  • More and more institutions look at the Polish economy with rose-coloured glasses, as upward surprises in August data triggered a spike in GDP growth forecasts. Better-than-expected readings were observed in many statistics, including industrial output, wages and PMI index, which was not good enough in the previous months. The Polish economy is learning to fly, fuelled by strong consumer demand and positive business climate in Western Europe.

  • We joined this tide and raised our GDP growth forecast to 4.2% in 2017 and 3.8% in 2018. The National Bank of Poland (NBP) is also optimistic about monetary outlook, noting no major imbalances, believing in low inflation and sticking to the waiting mode.

  • However, the reality behind the rose-coloured glasses may prove too good to be true. Despite NBP's claims of no imbalances, we see at least one: the labour market, which is increasingly more squeezed, with unemployment free fallin' and rising higher wage pressure. Stronger wage pressure is likely to translate into higher price growth, at least in services. The housing market also seems to be booming and price tendencies on this market are likely to gain steam, in our view. Value of new EU-financing contracts in 3Q17 proved disappointing and was lower than in respective period of the previous financial framework (2007-2013), for the first time in a year. On the other hand, there may be something good coming in investment in machinery, so we keep our investment forecasts intact but with changed breakdown. On the fiscal front, we estimate that improvement in VAT collection was achieved almost exclusively via lower tax refunds and in our view there is not much space to make it better in 2018.

  • We stand a chance to witness the Monetary Policy Council start discussing hikes in 2018, even though the NBP president remains dovish. We already have hawkish rebels among Polish central bankers, in our view some policymakers are likely to join this camp when the time comes.

  • US investors also decided to put on the rose-coloured glasses, as economic data proved upbeat despite recent hurricanes and the market finally believed in December Fed hike. This triggered a strong correction of the interest rate market, making Polish bond yields climb that hill and reach the highest levels in 6 months. In our view, upward pressure on yields may continue, yet low debt supply in Poland is likely to limit the potential to rise on the front end.

  • The only fly in the ointment is the European politics. The situation in Spain and very good results of far-right Alternative für Deutschland in Bundestag election raised worries about political stability in the major EU economies. This has hurt the Polish zloty, which anchored above 4.30, the highest level since March 2017. In our view, the zloty may keep on swingin' just below this mark.

Keywords bzwbk, macroscope