Economic Analysis

In today's Eyeopener:

- ECB more dovish than expected
- In January, the MPC voted both to hike and to cut rates
- Zloty and other CEE currencies weaker, dollar appreciated
- Polish bond yields down, but less than abroad
- Today flash PMIs for industry and services in euro zone, Polish M3 money supply

• As we predicted, most of domestic data releases for December were below consensus and confirmed economic slowdown in 4Q19. After the weekend the scale of economic slowdown will be verified by the flash GDP data for 2019, to be released on Wednesday. In our view, the latest production and sales data implied a high risk that the GDP growth in 4Q19 did not exceed 3.5% y/y, which would imply average 2019 growth at 4.1%. Market consensus is at 3.8% and 4.2%, correspondingly, which means the potential for another negative surprise.
• There will be quite a lot data releases abroad: GDP in USD and Europe, German Ifo, ESI business climate, US consumer data. After the last positive surprise from the European PMIs every positive news may reinforce upward pressure on core bond yields.
• On Wednesday evening the FOMC announces its decision. No change in monetary policy is expected, but markets will closely watch any hints regarding the outlook for the future.

Retail sales expanded by 5.7% y/y in December, in line with our expectations and slightly below the market consensus. We see some minor slowdown in retail sales and consumption to come, but private consumption will remain the main growth driver given rising social benefits. The implications from January consumer survey data are similar – in general, the sentiment is going down gradually, but the indicators regarding openness to larger expenditures remain robust.

Poland is lagging the developed Europe in this economic cycle. The slowdown, which started quite late, may not end before the end of 2020. We see chances for a gradual improvement of business activity in Germany and the euro zone in the second half of the year, but we may have to wait until 2021 before we see a visible pickup in Polish GDP growth, due to domestic demand inertia (sluggish investments) and base effects (expiring boost for consumption from the pre-election fiscal package). According to our forecast, GDP growth will slow to almost 3% in 2020, from around 4% in 2019 and 5% in 2018. 
 

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.