Polish Economy and Financial Markets.
In May's MACROscope:
We are days away from the release of flash 1Q GDP data and we still believe that the pace of economic growth remained close to 5% y/y at the start of 2018. There is growing evidence that the peak of the cycle is already behind us (the recent revision of the GDP data by Statistics Poland even revealed that the peak was reached a bit earlier than we thought - in 3Q17 rather than 4Q17), but in our view the outlook for the nearest quarters remains moderately optimistic, and this year’s average GDP growth (4.3%) should be only slightly below that from 2017 (4.6%).
Investment rebound at the end of 2017 was much smaller than initially shown by the statistical data (5.4% y/y instead of 11.3% y/y) and it seems that the private sector still remains idle in terms of investment spending. Fortunately, local governments entered the spending spree ahead of the autumn elections, which allows us to keep our investment growth forecast for this year unchanged, at almost 7%. At the same time, what seemed to be an unusually supportive external environment for Polish economy started changing towards less friendly setup, as we see growing signs of weakness in the European data. Polish exports has clearly underperformed in the recent months and it seems the net exports’ contribution to GDP growth this year will be negative. The good news is that the private consumption has good reasons to remain strong or even accelerate, as the labour market is booming, households’ income is rising, and the consumer sentiment is record high. Most likely, consumption will be the main force pushing economy forward for the third year running.
Despite positive output gap, strong consumption and tightening labour market, there is still hardly any evidence of building inflationary pressure. Not only the domestic core inflation remains low (near 0.7% y/y), but the Eurostat’s core HICP for Poland fell surprisingly to deflationary zone, and prices of services decelerated. This surely keeps the Monetary Policy Council in the comfort zone with its ‘wait-and-see’ approach. After few negative inflation surprises recently, the next few months may bring a rebound, as higher oil price and weaker zloty would push CPI above 2% mark for at least 2-3 months. But it would require much bigger and more persistent impulse to see the change in the central bank’s dovish approach, so we still believe the main interest rates will remain on hold at least until November 2019.
The fiscal outlook remains sanguine and as long as GDP growth remains decent and spending rule holds there is no significant risk for the public sector deficit. The European Commission’s first proposals for the EU budget suggest that Poland’s net inflows will be reduced but it is too early to say exactly by how much. The negotiations on the EU budget are only starting and it is still a long way before we know the final numbers.
The zloty depreciated more than many of its EM peers during the general currencies sell-off in recent weeks. Statistically, May is rather unfavourable month for the zloty but the next Polish macro data should still look quite decent, possibly helping the zloty to recover a bit. Still, there are many geopolitical risks around, limiting the room for much lower EURPLN.
The profit-taking after the earlier rally and rising geopolitical tension negatively affected the domestic bonds market in April and early May, which led to rapid yields increase. In the coming weeks we expect yields to decrease slightly, which should be supported by the expected weaker Eurozone consumption and inflation data. The risk factor for this scenario is further spike in crude oil prices, which could boost inflationary expectations.
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