Polish Economy and Financial Markets
In June MACROscope:
The GDP growth slowdown to 3.0% y/y in 1Q16 was stronger than expected, but we see increasing evidence that the following quarters should be better, as economic growth should be supported by strong external demand (growth in the Euro zone, particularly in Germany, is doing fine) and accelerating private consumption (boosted by solid labour income and new child subsidies). The biggest uncertainty concerns investment growth. Still, we expect the Polish economy to gradually accelerate, reaching nearly 3.5% on average in 2016. Deflation is surprisingly persistent, but we think that the CPI has already passed the trough and, over the coming months, there should be a gradual pickup towards 0.5% y/y at the end of this year and 1.5% y/y at the end of 2017.
The MPC meeting in June, the last chaired by Marek Belka, brought no surprises. The main message remained unchanged: deflation has shown no negative effects, the GDP slowdown in 1Q16 was temporary and interest rates are at optimal levels. The Sejm has already approved Adam Glapiński as the new central bank governor and he should be sworn in on June 21. Mr Glapiński, an ex MPC member, is an advocate of conservative monetary policy. He also suggested recently that the current level of interest rates is adequate and the central bank should leave them stable for as long as possible. Investors have now scaled back their expectations for interest rate cuts in Poland and we expect no significant change in the monetary policy outlook after Mr Glapiński takes over the NBP chair. Further monetary easing seems unlikely, as long as economic growth does not slow further below 3% in the coming quarters.
The Polish financial market has been under pressure recently, due to both internal (the FX loans issue) and external risks (next FOMC decisions and the EU membership referendum in the UK). We think those uncertainties may continue to affect market sentiment in the coming weeks. On June 7, the team of experts working on the new FX loan proposal concluded their work, but we think it may take at least several more weeks until Poland's president decides the final shape of his new proposal.
In the bond market, the 10Y spread vs German bunds rose significantly above 300bp and we think it may remain high, at least while the key uncertainties remain. At the short end of the curve, the room for yields to decline looks limited, as the structural excess liquidity of the banking system has been gradually drying up (the value of outstanding NBP bills fell to PLN65bn in early June from over PLN90bn at the start of the year) and it seems that bank demand for short-term treasury securities is reaching its limit.
We expect the FX market to remain volatile in the coming weeks, until the result of the UK referendum on EU membership and the Polish FX loan conversion issue are cleared up. We do not rule out a temporary zloty strengthening at the end of June. But the currency may remain volatile in the following months, as fresh uncertainties will arise (details of the 2017 budget, rating agency decisions on Poland's sovereign debt and the government's decision on the retirement age).