Sum of All Fears
In October's MACROscope:
The fears of looming global economic slowdown are on the rise. The OECD and the IMF have just trimmed their global growth forecasts, blaming the escalating trade tensions, rising interest rates and stress in emerging markets for the deteriorating outlook. The downward forecast revisions have been modest to date, but at the same time there was a growing concern that the risks to global outlook have been strengthening and tilting to the downside.
Poland has been relatively well protected against rising pessimism about external situation, with consensus growth forecasts continuously trending higher. But still, 3Q18, which has just ended, was probably the first quarter in over a year when GDP growth was visibly below the 5% y/y mark. Looking ahead, we remain moderately optimistic, assuming that economic growth will decelerate quite slowly, remaining above its potential rate (near 3% p.a.) for over a year. Thus, Poland should remain one of the EU’s top performers in terms of economic growth. The main risks to this sanguine scenario are still external, with the ‘no-deal Brexit’ being potentially the biggest elephant in the room (in this – still not the most likely – scenario, Poland would be among the most affected countries in the EU).
Last month we had suggested that August marked a turning point for Polish inflation, but September CPI data were lower than forecast again. Nevertheless, we are not losing confidence that in 2019 inflation will be trending higher, reaching or even exceeding slightly the official 2.5% target, with the risks increasingly tilted to the upside. Even if the energy market regulator (URE) does not allow for sharp hike in retail energy tariffs before elections, core inflation will be under increasing influence of growing cost pressure on companies.
We do not change expectations regarding the monetary policy outlook: the first rate hike possible at the very end of 2019 at the earliest. It is important to note that the NBP Governor Adam Glapiński has withdrawn from his earlier declaration about potential rate stability until the end of 2020, now mentioning only the end of 2019 or at most early 2020.
The Polish zloty has been quite resilient to swings in investors’ moods in recent weeks and we see some room for PLN strengthening until the end of the year, assuming that the most extreme external risk factors do not materialise. Correlation between EURPLN and EURUSD has faded recently but it appears that euro strength still has a lot impact on the zloty. We keep our view that EURUSD should rise as the ECB has started to normalize its monetary policy and a great deal of the Fed rate hikes are already priced in.
The seloff in US Treasury market has pushed domestic yields higher recently, but we expect the Polish bonds to strengthen in the coming weeks, as the market will be flooded with cash due to the looming large bond redemptions and coupon payments at the end of October, plus the nearest data releases could be below consensus.
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