Santander MACROscope - Economic equinox


September's MACROscope

In September's MACROscope:

-    We know we have said it a milion times already – the economic acceleration has reached the top and now we should switch to expansion phase, with some gradual slowdown. And yet, the 2Q GDP was no different from most of the readings from 2017/2018 in getting above market expectations. What is more, the 2Q growth breakdown showed that investments are still lagging behind the business cycle which means (to optimists) that when they finally do shoot higher the growth plateau of 5% y/y will be maintained for several more quarters. But there is an alternative way to read the surprisingly low investment path. Even the explanations from the Stats Office that military expenditures got reclassified, and there is nothing more to it, will not entirely remove our doubts that there is a split in the situation of enterprises that prevents a full-blown rebound of invesments. Large enterprises have high profits, liquidity and are willing and able to invest (investment growth of 13% y/y reported for 2Q). But when it comes to SMEs, the labour cost pressure is denting margins, there are liquidity issues, payment delays and bankruptcies and this is not an environment that would encourage expansion plans through excessive investments. Meantime, in the public sector the local governments ahead of autumn elections are in investment boom phase.  

-    We do not think economic growth could push higher from where it stood in 2Q, and July/August declines in business sentiment indicators are not going to be corrected. It is a broader phenomenon, affecting the euro zone too, and it requires an increasing amount of optimism to still see Germany’s deterioration in industry as something transitory, especially with the way trade wars are expanding.

-    Another area where we are at a point of a change of direction is the Polish inflation. August saw the first significant rebound of core CPI in this cycle, a long overdue rebound, given all the labour costs pressure coming from the tight labour market. Services prices have also just started to grow at a higher pace. It was easy for the Monetary Policy Council (MPC) to tolerate GDP growth rate above potential and the closed output gap, as long as core inflation remained very low and idle. Still, we are expecting the underlying inflation to climb in the months to come. The NBP projections have already shown that core inflation could be heading above 1% this year, to 2.5% (the target for headline CPI) by the end of 2019 and beyond in 2020, but if this projection materialised it would be more difficult for monetary policy makers to just ignore the process. Note however the headline CPI is unlikely to push higher in 2H18, due to base effects in food and fuel.

-    All the turmoil on emerging market currencies plus the protectionist rhetoric and actions across the globe do not feel like the environment that could strengthen the zloty. The positive side to this is that all this should already be priced-in and markets got fed up with Trump tariff announcements and trade negotiations. The zloty was also quite resilient to the TRY, BRL and ARS meltdown as well as to the sharp reaction of US Treasuries after the strong August NFP report. It might not be doomed after all.

-    As regards Polish bonds, we think that upward pressure on yields may persist in the coming weeks. It would be caused by global factors (higher bond supply in core markets, negative EM sentiment) and domestic situation (higher expected issuances of POLGBs in next months and in 2019, plus bonds sell-off by some local asset management firms due to large redemptions). Still, we think that in the medium horizon the Polish market should remain relatively well protected from the EM turmoil due to solid economic fundamentals and lack of important vulnerabilities of the economy.

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Keywords: Santander, BZWBK, MACROscope

Author: Santander Number of pages: 13 Price: Content is free of charge