Economic Analysis

In today's Eyeopener:
 
- Today, German PPI inflation, already released
- Polish GDP data revision showed higher investment growth in 2023, lower in 2022
- Polish consumers’ assessment of current situation still improving
- Stable FX market yesterday, slightly stronger dollar, lower domestic yields and higher US yields

Next week will see a sizeable set of domestic data releases describing the state of the economy in March: on Monday, wages and employment in the corporate sector, industrial and construction output, PPI, plus the GUS business climate indices for April; on Tuesday, money supply; on Wednesday, unemployment and other details in the GUS Statistical Bulletin. (...) Abroad, key releases include flash manufacturing and services PMIs, the German Ifo index, in the US the first estimate of 1Q24 GDP and the March PCE deflator (the Fed's preferred inflation measure). Interest rate decisions will be made by central banks in China (Monday), Hungary (Tuesday), Turkey (Thursday) and Japan (Friday). In Hungary, another rate cut is expected (by 50bp, to 7.75%), while no change is the most likely outcome elsewhere. Some analysts do not exclude an announcement of the start of QT by the Bank of Japan.

The statistical office revised upward the inflation reading for March to 2.0% y/y from 1.9% (0.2% m/m) versus 2.8% in February. The revision was due to, among others, a slightly smaller decline in food prices (-0.1% m/m vs. -0.2% m/m previously). Our core inflation forecast was unchanged since the release of the flash CPI reading and we still see inflation falling to 4.6% from 5.4%. Inflation reached a local low in March with goods inflation falling to 0.4% y/y from 1.4% and with still elevated services inflation declining only to 6.6% y/y from 7%. We expect a gradual increase in headline inflation to 5.2% y/y in December and a gradual decline in 2025, but at the same time we believe core inflation will remain elevated in the 4-5% range until the end of 2025, which will be the main argument for the MPC to keep interest rates unchanged till around mid-2025.

While the decline in inflation in major economies has slowed and the market expects fewer rate cuts in the US and the euro area, inflation in Poland once again surprised on the downside and fell to 1.9% y/y, below target for the first time since May 2019. The next few months are likely to bring higher inflation readings, while core inflation is likely to remain elevated, in the 4-5% range until the end of 2025. Real wage growth accelerated to nearly 10% in February, the strongest since the late 90s, and nominal wage growth will remain in double digits in our view. This will contribute to the acceleration of consumption, which will be the main driver of growth. Activity data for February showed positive surprises in sales and industrial production. The prospect of a recovery in GDP (we expect 3% this year) and continued elevated core inflation and will make it likely that the MPC will not change rates until mid-2025.

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.