Stockpiles of economic growth
Polish Economy and Financial Markets.
In June's MACROscope:
While most of the European economies experienced a soft patch in 1Q18, Poland managed to surprise to the upside once again, with GDP growth reaching 5.2% y/y, or 1.6% q/q in seasonally adjusted terms (one of the four best results in the last ten years). Such result placed us again at the top of the economic growth rank in the European Union. The breakdown of GDP growth was equally interesting as the number itself, as the surge in inventories appeared to be the main factor behind the positive surprise, adding almost 2pp to the GDP increase, while the remaining components fell short of expectations. We think, however, that the data broadly confirm our expected economic scenario, where private consumption remains the main engine of growth and fixed investments recover gradually from a prolonged stagnation. Although the five-percent GDP growth will be hard to sustain, the pace of expansion should remain decent, with the domestic demand playing first fiddle. Given the better than expected starting point and improving fiscal performance (which leaves more room for public consumption expansion, in our view), we decided to up slightly our GDP growth forecast for this year, from 4.3% to 4.5%.
Despite the economic growth surprising to the upside, inflation continues to disappoint. The downward trend in CPI reversed temporarily due to a spike in fuel prices, which was in line with our expectations, but it seems that the rebound will be quite weak and short-lived, with CPI getting only a notch above 2% y/y mark in June and then retreating back to 1.5% by year-end. As we wrote recently in the research note – it seems the price pressure should be going up in a few quarters' time, but not earlier, as companies still have buffers thanks to positive results built in the last two years.
This leaves us with the unchanged conclusion that the Polish central bank will not be in a hurry to change the monetary policy stance. The recent comments from the Monetary Policy Council confirmed, in our view, that the first interest rate hike is unlikely before the very late 2019.
The superb economic and fiscal performance did not shield the Polish financial market perfectly from the risk aversion that has dominated the emerging markets universe in the recent weeks. The political heat in Italy, worries about global trade wars, the strengthening US dollar and expected further policy normalisation by the world's main central banks resulted in a general sell-off in emerging markets, which hit the most the countries with large current account gaps and high USD debt exposure. Although Poland is not in the most exposed group, the fact that EM countries have tightened monetary policy 22 times in 2018 to defend against a capital outflow, with the Polish MPC maintaining the very dovish policy outlook, could be among factors limiting Polish assets' lure to foreign investors.
Although the zloty recovered somewhat at the beginning of June, it is still the seventh weakest currency among its emerging market peers when we look at performance since mid-April. We see some room for further zloty strengthening in the short run (June-July), as the dollar depreciation, stabilisation of global moods and solid local data can give the currency some relief. August usually is a period when Polish currency weakens.
As regards the debt market, we expect a moderate decline of yields after the FOMC and ECB meetings in mid-June, as, in our view, the messages from the central banks press conferences should calm down investors' excessive concerns about the end of ultra-easy money era.
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