Economic Analysis

- Italy government problems, US president Biden fiscal package
- Zloty and koruna weaker, forint and rouble stronger
- EURUSD even lower
- Polish bond yields slightly lower while IRS higher
- Today inflation in Poland and a speech of NBP’s Glapinski

The winter holidays are coming to an end, but the restrictions are not going away (except that children from classes 1-3 go back to school). Many other European countries are also extending or even strengthening pandemic restrictions in reaction to the rising wave of new Covid-19 infections. It means that economic results of 1Q21 will be still weak, but it should come by no surprise – in the MACROscope report released in December we wrote that the pandemic threat will weigh on the economy throughout winter. What is more worrying though is the disappointing pace of vaccination (not only in Poland) and the new mutations of the virus (UK, South Africa, Brazil), with much higher transmission capabilities.

Final December CPI was released at 2.4% y/y (down from 3.0% in November and vs 2.3% in flash reading). Core inflation ex food and energy prices went down to 3.7-3.8% from 4.3% in November. We are expecting 2021 CPI inflation to average slightly below the NBP target at 2.5%, with core inflation going further down. This will be supportive for keeping interest rates unchanged. Recent spikes in FAO food price index pose some upward risk for our forecasts of food prices.
GUS preliminary data on November foreign trade in goods showed that exports rose by 9.8% y/y thanks to much stronger demand from the euro zone, while the surprisingly strong imports growth at 4.1% y/y was caused by a rise of deliveries from the EU.
 

Covid-19 was the main theme in 2020 and will remain the key topic also in 2021. Assumptions about how the pandemic develops are critical for predicting economic scenarios. While there are still many question marks (how quickly and effectively will the vaccine be distributed, how many people will volunteer to take the shot), we think it is rational to assume that somewhere around mid-2021 the mass vaccination reaches the sufficient level to curb worries about potential next waves of the pandemic.

In September's Rates and FX Outlook:
 

• Poland’s GDP growth failed to accelerate in 2Q16, with investments surprising negatively (-4.9% y/y), and we think that the second half of the year will see no significant improvement in economic growth. Although private consumption is likely to gain strength in the coming quarters, supported by solid labour income and the new child subsidies, it may take time until investments recover, and the positive impact of net exports will be hard to maintain (export growth may decelerate and imports accelerate). We expect a more significant investment pick-up next year, but by then the impact of the 500+ child benefit programme on consumption will be dissipating. Therefore, we forecast that GDP will grow 3.1% in 2016 and 2.9% in 2017.