Trade Wars: The customs menace
Polish Economy and Financial Markets.
In July's MACROscope:
The new episodes of trade wars unfolded, as Donald Trump's administration imposed tariffs on $34bn worth of Chinese goods and announced plans to add duties on further $200bn of imports. The menace of disruptions in international trade is rising, but we think it is still too early to say that the dark side clouds the global economic outlook, especially that China signalled it was still ready to negotiate the new trade arrangements with the USA, which gives a new hope for de-escalation of conflict. In fact, the short-term perspectives look quite optimistic, in our view. The most recent data from Germany has finally shown some positive surprises after a disappointing start of the year, and data from Poland still confirm that the economic growth remains resilient.
It seems more and more likely that the second quarter of 2018, which has just ended, witnessed a GDP growth near 5% y/y again, with strong contribution from private consumption and investments and less negative impact of net exports. We still think the peak cycle is behind us, but apparently the economic slowdown in Poland is like the vanishing point on the horizon – it does not come any closer as you march forward.
A similar story seems to apply to the inflationary pressure. The CPI growth accelerated slightly in May-June, but the impulse came entirely from higher prices of food and fuels. Meanwhile, core inflation excluding food and energy still shows no signs of life and even decelerated to 0.5% y/y. As we wrote last month, the solid financial results of Polish companies may be delaying the process of pass-through from higher costs to higher prices. However, we still believe that the upward trend in the underlying inflation will finally materialise in a few quarters' time as the tensions in the labour market will only get stronger. It should be facilitated by the change in external inflationary environment (higher price growth in Europe), higher prices of commodities, and weaker zloty.
The new central bank economic projection is similar to our forecasts. Inflation predicted for 2018 and 2020 has been lowered slightly as compared to the March version, but the return of the CPI above the official 2.5% target is still predicted in 2019-2020. GDP forecast has been increased for 2018 and lowered slightly for 2019-20. The new projection gave the MPC absolutely no new arguments to change view, so the central bank still believes that there are no reasons to mull changes in monetary policy in a foreseeable future. We still believe that the main interest rates will remain on hold at least until November 2019. NBP governor Adam Glapiński believes that no policy changes would be needed even until the end of 2020, which would probably make him the last Jedi holding rates stable among the central bankers in the region.
Polish currency depreciated sharply at the start of summer holidays, amid concerns about the global economic growth (due to next stage of trade wars), dollar appreciation and political tensions in Italy and Germany. We see room for moderate recovery of the zloty due to solid domestic data, but also thanks to stabilisation of global market sentiment and expected euro strengthening vs. dollar.
Polish bonds remain quite resilient to changing market moods. We think that sizeable bond redemptions and relatively low supply of new debt in July will help yields to get even lower in the coming weeks. Market weakening is possible at the end of summer, in our view, when the Ministry of Finance will probably increase bond supply at outright auctions and worries about economic slowdown abroad may cause expectations of additional fiscal stimulus.
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