Correction or beginning of a trend?
Polish Economy and Financial Markets.
In November MACROscope:
In the third quarter of 2016, GDP growth decelerated to a mere 2.5%YoY, which was the lowest reading in three years. The detailed data will be released at the end of November, so at this stage it is difficult to assess what was behind the slowdown. The additional problem with forecasting GDP for the following quarters was a significant revision of historical annual data. The latest statistics showed last year's GDP growth much higher than previously claimed – 3.9% vs 3.6%. The quarterly path is not known yet, however. Taking this into account, we will be publishing the new forecasts in December in the Outlook for 2017. Nevertheless, it is quite clear that the last quarter of this year will be also below earlier expectations (probably below Q3 reading). During next year we should see an acceleration, though.
We do not think that lower-than-expected GDP for the third quarter will change significantly the approach of the Monetary Policy Council. The latest, November GDP projection of the central bank will turn out to be overly optimistic again, while the MPC will assess the slowdown as a temporary phenomenon (though deeper than forecasted). Still, we do not exclude that FRA market would again try to price-in a monetary easing in the 6-9 months horizon. At the same time, we think that outlook for Polish central bank's reference rate for 18-24M horizon is rather on the upside than on the downside. In the following months, considering a rate cut by the MPC might be also difficult if one takes into account the situation on the foreign exchange market.
In the previous reports we mentioned many times our call for a weaker zloty in the final quarter of the year. Our forecast of EURPLN at 4.40 for December has already materialised, although we have to admit that the trigger was different than expected (higher uncertainty on global markets after US elections). We do not assume the zloty to lose more ground against the euro, but we still see unfavourable conditions both global (December rate hike by Fed) and local (much lower than expected GDP growth) as limiting chances for a significant recovery of the Polish currency before year-end.
Together with zloty depreciation, we had expected a higher risk premium and a temporary rise in 10Y spread against German Bunds to above 300bp. While it actually happened in November, the two other issues are (at least) equally important. Firstly, is the rise in yields indeed only temporary? Secondly, the rise in spread materialised with a significant increase in global yields. In other words, there is a question if the era of low inflation and ultra-loose monetary policy is coming to an end – a scenario which global markets seem to price-in after the US elections. We see the recent sell-off as exaggerated and we think there is a chance for some recovery. For the Polish market this would mean lowering of the spread against Bunds to the levels observed recently at the start of November. As regards the 10Y yield, we think that the level of 3.10-3.15%, which was for some time the upper end of the trading range, now may become the lower end of the range. In the medium-term we still expect a moderate increase in yields both locally and abroad. Suffice it to say that the level of 3.50% for 10-year yield, which was reached in mid-November, was our target for the end of ... 2017.