BZ WBK MACROscope - A longer period of uncertainty?
In October's MACROscope:
- We see a strong resemblance between the current economic situation and the pattern of almost exactly a year ago: the PMI index is falling sharply, we have had some disappointing economic data (except for the labour market, which is doing fine), and external shocks are fuelling uncertainty about the global economic outlook (currently a slowdown in China and Emerging Markets, and a year ago Russian sanctions following the crisis in Ukraine). Even though the uncertainty and risk factors are likely to last longer (China, Volkswagen issue, Brazil, Greece, to name just a few), we believe that there are good reasons to expect the Polish economy to continue its healthy economic growth (c3.5% YoY in 2015-16), just as it did one year ago (details on p. 2-3).
- Two weeks before the parliamentary elections the result seems highly uncertain and different opinion polls suggest different results, not to mention the fact that in past elections the polls were unreliable. Additionally, if there is no clear winner, the period of uncertainty may not end just a week or two after the election day, but may last until winter (or longer). On page 5 we present the timeline of procedural steps defined by the Constitution, together with the latest possible deadlines laid down by law.
- Flash CPI data showed deflation deepening in September to -0.8% YoY, but we think this was only a temporary pause in the upward trend, which will push inflation above zero in November and towards 2% in 2016E. We still argue that, in these circumstances, there should be no need for Polish monetary policy to ease in 2016E, even though market speculation about possible rate cuts has been growing recently. This will probably continue, which may push domestic interest rates even lower. The long end of the domestic yield curve may obtain further support from falling yields on core markets, limited debt supply in October and a substantial inflow of money from bond redemptions and coupon payments. The scope for strengthening is limited, in our view, amid decent macro data and some investors may be willing to cut their exposure given electoral uncertainty. Until year-end, long-term yields are likely to rise, though an additional risk factor here concerns US monetary policy, as after September's meeting this uncertainty may last longer than previously thought.
- EURPLN volatility dropped substantially in September and we now see a risk of a zloty depreciation vs the euro in the nearest days, given the uncertainty ahead of the October election and the Fed meeting. However, we think such a move would only be temporary. The Polish currency should regain strength at the end of this year, supported by the following factors: (1) a continuation of healthy economic growth; (2) rising inflation, which will reduce rate cut expectations; and (3) a US rate hike before the end of the year (limiting worries about global growth).
Poland Macroscope Oct 2015