Time for adjustments
Polish Economy and Financial Markets.
In October MACROscope:
Following the forecast change at the start of the summer holidays, we still maintain the view that the Polish economy will not grow faster that c3% in the following quarters. Actually, the recent economic data suggested, in our view, that GDP growth in Poland has probably slid below 3% y/y in the third quarter. Although we saw a number of forecasts readjustments for Poland by different institutions recently (see chart on the left), the GDP consensus forecast for Q3 (3.4% y/y, according to Bloomberg) is still too high, in our view. Private consumption will remain robust and is likely to gain strength in H2 (moreover, in Q4 it may get an additional boost from advance payments of subsidies for farmers, worth up to PLN10bn). Meanwhile, it seems that investment weakness persists, which is manifested, among others, through a dramatic slump in the construction output. Export growth has been decelerating in the recent months, and although the last surveys suggested a pick-up in export orders in September, foreign trade contribution to GDP growth may be smaller than in H1, we think.
Deflation started diminishing, though slowly, in September it rebounded to -0.5% y/y, from -0.8% in August. The upward trend should be maintained in the coming months and December may be (though it is not as certain as a few months ago) the first month with positive inflation rate, after 29 months of deflation in Poland. Still, it may take more than a year until inflation rate starts approaching the official inflation target. Recent disappointing macroeconomic data slightly reduced the Monetary Policy Council's optimism about the GDP growth outlook, but their general stance did not change too much. The central bankers signalled quite clearly they are not even thinking about interest rate cuts, as they believe that the slowdown in GDP and investments was temporary and deflation has no negative effects on the economy. We still see official rates flat till end-2017.
It appears that financial markets have completely lost faith in monetary easing in Poland. We would need to see very disappointing economic data to witness reviving expectations for interest rate cuts, especially if inflation rate is trending up. A weaker-than-expected Q3 GDP (mid-November) or/and a revision of GDP projection by the National Bank of Poland (start-November) might be an important signal for rates market. We still think that yield of the 10Y Polish benchmark of above 3% might be perceived as attractive in the world of ultra-low interest rates. On the FX market, we expect the zloty to depreciate in the final quarter of 2016.
Last month we saw a couple of interesting reshuffles in the government and the central bank. The Finance Minister, Paweł Szałamacha, resigned, and deputy PM, Mateusz Morawiecki, assumed his responsibilities. Szałamacha was appointed NBP board member (no specified duties yet). At the same time, Marek Chrzanowski stepped down from the MPC and was appointed KNF Chairman (Polish Financial Supervision Authority). We do not think the changes will substantially affect the macroeconomic policy in the following quarters/years. The new Finance Minister, Morawiecki (who is also heading the Development Ministry), strongly emphasised a pledge to keep the fiscal deficit under control, below 3% of GDP. Also, a new MPC member (appointment within three months) is not likely to change the balance of power within the Council. As regards the KNF, Chrzanowski emphasised many times in the past the importance of stability of the financial sector.