2018 Outlook: Poland


Macro, Rates and FX

In the special edition of the MACROscope we present our forecasts for Polish economy and financial market for 2018:

  • GDP growth accelerated much more than we expected in 2017, nearing 5% y/y in 3Q17 and probably around 4.5% on average in the entire year. It was driven by very strong private consumption (first 500+, then healthy labour income and a lower savings rate) and an exceptionally supportive external environment (solid recovery in the Euro zone) boosting Polish exports. The long-awaited revival in investments started to materialise in 2H17, although slowly and mainly in the public sector. We expect economic growth to remain decent in 2018, near 4%, still strongly supported by buoyant external demand and local consumers. While we see reasons to expect a further rise in investments, We also see arguments why a rebound in this area could be only moderate and less significant than in the corresponding period of the previous EU financial framework.

  • Unemployment fell to a record-low and the shortage of workers became a major headache for Polish companies and a key barrier for further business expansion. Fortunately, immigration from Ukraine has not slowed and the labour participation rate has been growing until recently, which helped to alleviate the problem. Nevertheless, it was not enough to stop wage pressure from building up and we expect wage growth to accelerate further in the coming year, as the gap between demand for labour and  supply is likely to widen.

  • The surge in labour costs is very likely to push services prices higher and so we think that core inflation will trend up in 2018, towards 2% y/y. In case of headline CPI, we expect to see ups and downs, with a rise above the 2.5% target mid-year and then a retreat, perhaps even below 2%, due to high base effects in food and energy prices.

  • Although several Monetary Policy Council members already see arguments for a policy tightening, we think the NBP president and the majority of the Council will remain patient and the first 25bp rate hike will not take place before 4Q18, when the prospect of inflation persistently exceeding the official target becomes much more tangible.

  • The fiscal situation in 2017 not only remained under control, but again proved to be much better than expected. The government’s draft budget for 2018 assumes a moderate widening of the deficit, despite the good economic cycle, but as long as economic growth is strong, the fiscal outlook is unlikely to unnerve investors or rating agencies.

  • The Polish zloty proved to be one of the best-performing emerging market currencies against the euro and the US dollar in 2017. After more than two years of high volatility, in the last few months EUR/PLN has become much more stable. It seems the market has already digested most of the risk factors, both as regards the global situation (monetary policy normalisation, US tax reforms, Brexit) and Polish internal politics. We think that the PLN exchange rate is likely to fluctuate in a relatively narrow band  in the coming year, as it did in 2013-2014.

  • In 2018, we expect bond yields to rise across the curve. In our view, the better part of this move will take place in 1H18. Despite the CPI’s temporary drop to c2% y/y at the start of the year, stronger wage pressure and mounting core inflation may boost expectations of a rate hike (we do not rule out that a first, unsuccessful, motion to hike rates could be tendered in 1Q18). This process, together with the expected normalisation of monetary policy in the US, should push the whole curve up, particularly at the long end. Higher yields may be also justified by a larger supply of bonds in the first quarter of 2018.

  • In 2H18, we expect some recovery at the long end of the yield curve. This should be supported by a slight weakening of business climate indicators in the Euro zone.

  • At the same time, we expect the trend of a falling cost-of-credit risk (reflected in the asset swap spreads and yield spreads vs. German Bunds) to continue, owing to a still positive assessment of fiscal indicators.


Keywords: BZWBK, MACROscope

Author: BZWBK Price: Content is free of charge