Don't get too excited
Polish Economy and Financial Markets.
In March MACROscope:
Poland’s GDP growth in 4Q16 was higher than expected, reaching 2.7% y/y or as much as 1.7% q/q in the seasonally adjusted terms (the biggest rise since 2007). However, we didn’t get too excited about 2017 growth outlook, as the fourth quarter’s result was boosted, at least to some extent, by the frontloading of the government spending, which suggests that public consumption this year may be weaker. Investments were still falling at nearly 6% y/y in 4Q16, and we think that their recovery this year will not be very quick. Applications for EU funds, after having accelerated at the end of last year, have slowed down again in 1Q17, according to the data from the Ministry of Development (but it will affect investment growth probably not earlier than in 2018). Private consumption remains healthy, but, in our view, not strong enough, to trigger a significant growth acceleration. Meanwhile, the likely acceleration of exports growth will be probably coupled with even stronger import revival, so the net trade balance should remain almost neutral for the economic growth this year. In general, we remain moderately optimistic about the economic outlook for the coming quarters, predicting that GDP growth to be around 3% y/y, only slightly higher than in 2016.
The headline inflation rate has picked up sharply at the start of the year, mainly due to base effects and situation in global fuel and food markets, and may top 2% y/y in the nearest months. However, we still see no signs of strong underlying price pressure, and we predict that, after levelling off later this year, the headline CPI may even temporarily drop below 2% again, with the core inflation moving up very slowly from the current zero level.
We do not expect the central bank to hurry with the monetary tightening in such environment. The Monetary Policy Council has softened its rhetoric again after the last meeting, even though the inflation and GDP forecasts went up, which shows that their argumentation is quite flexible and adjusts to the situation. Even if the next inflation data continue to surprise positively, we believe the Council will be very patient with its ‘wait-and-see’ approach. Our baseline forecast assumes that the central bank may wait even until the late 2018 before changing interest rates in Poland from the current level.
Despite the selloff in the core debt markets, Polish bonds have been performing relatively well in the recent weeks. The 10Y bond yield spread versus German Bunds has narrowed to 326bp, its lowest since December 2016. Even though the perception of the country risk seems to have improved and worries about monetary tightening are fading away, we think that there is little room for Polish yields to decline. The uncertainty related to the elections in Europe and to monetary policy outlook abroad may result in consolidation or even upward trend in Polish yields, in our view. As regards the FX market, we still expect the short-term correction of the zloty due to technical signals and lower risk appetite amid political uncertainty in Europe. Later in the year, when the economic recovery strengthens, the Polish currency should gain.