So far, so good
Polish Economy and Financial Markets.
In February MACROscope:
Poland's GDP growth slowed to 2.8% in 2016, which means that the fourth quarter of the last year was slightly better than we had expected. It seems that the bottom of the economic cycle is already behind us, and we see the growing number of signs that the upcoming quarters will bring further revival in economic activity. Private consumption will be the main engine of growth, at least in the first half of 2017, while export should join relatively quickly, boosted by improving business climate in Europe. Investments are still in red, but we expect a gradual recovery in the coming quarters, mainly due to revival of EU-financed public spending.
Inflation is picking up quickly – it may reach 2% y/y by April – but it is mainly driven by low base effects and price hikes in food and energy, while the underlying price pressure remains almost invisible. Even though the unemployment rate is at record low level and falling, the average wage growth remains moderate. While we expect wages to accelerate in the coming months, the increase in core inflation should remain pretty much subdued (rising from around zero to slightly above 1.5% this year).
The Monetary Policy Council, which was not in a hurry to cut interest rates when Poland was in deflation, still remains in the 'wait-and-see' mode. The central bank has just softened its rhetoric and signalled it was ready to accept 'temporarily' negative real interest rates. We expect that main interest rates will remain on hold this year, however the market could start speculating about rate hike probability in the nearest months once the CPI growth hits 2% y/y.
It seems that fiscal deficit in 2016 could have been higher than we had expected. However, it resulted mainly from two factors: Eurostat's decision that revenues from LTE frequency auction should not reduce the general government deficit in 2016, but rather should be spread to the next 15 years, and the Finance Ministry's decisions that boosted state deficit in December 2016, but lowered the burden for 2017. In general, higher fiscal deficit in 2016 does not imply higher risk for 2017, but rather the opposite, in our view.
Expectations for higher inflation and faster economic growth boosted equity markets and the zloty in recent weeks, but were unsupportive for debt market. We think that the EUR/PLN's downside move could pause in near future and some profit taking after the recent zloty's appreciation could take place. We also see very limited room for strengthening of Polish bonds, as yields in core debt markets are still in the upward trend, and political risks in Europe (uncertainty before elections, renewed worries about Greece) also add to negative sentiment.