Poland: Economic growth to ease visibly in 2020

Watch this week

March 13 | Inflation to marginally increase in February

We see February inflation at 4.6% y/y (0.6% m/m), slightly above market expectations at 4.4% y/y. We think that the growth of food and services prices remained strong and was the main factor behind the increase of the headline figure. In our view, the disinflationary effect of dropping oil prices since the beginning of 2020 will likely be more visible in the March figure. We continue to see the FY20 inflation forecast at 3.6%; however, the drop of the oil price to below USD 40/barrel as an aftermath to the lack of an agreement between OPEC countries and Russia poses downside risks to our forecast.

Forecast revision | We revise our FY20 growth forecast down

We revised our FY20 growth forecast to 2.2%, due to weaker domestic demand as well as increasing fears over the spread of SARS-CoV-2019. We see private consumption easing to 3.0% in 2020, as consumer sentiment has weakened and labor market conditions are likely to ease. Investment growth will likely drop to 1.0% this year, due to increasing market uncertainty, which drags private investment down, slowing the utilization of EU funds, and the political cycle not providing a boost to public investment. As far as monetary policy is concerned, we keep our call for stable rates until the end of 2021. However, if inflation eases on the back of dropping oil prices and economic growth slows down considerably, the central bank could consider cutting rates in 2H20.

Last week’s highlights

Central bank kept rates unchanged at 1.5%. According to March projection, inflation is expected at 3.7% in 2020 (2.8% in November projection) and at 2.7% in 2021 (2.6% in November projection). GDP growth is expected at 3.2% in 2020 (3.6% in November) and at 3.0% in 2021 (3.3% in November projection).

Market developments

Bond market drivers | Virus infected bond market

Over the course of the week, the 10Y yield remained fairly stable and moved around 1.7%. However, the developments over the weekend, i.e. further spread of the SARS-CoV-2019 and no agreement between OPEC countries and Russia regarding the cut of oil supply, resulted in a panic on financial markets. As a result, the long end of the Polish curve dropped by 30bp within a day (as of March 9), mirroring the core market development. The 10Y Bund dropped further into negative territory towards -0.9%. As a result, the spread over the 10Y Bund narrowed to around 220bp. We see the spread in the coming weeks staying around the current level of 220bp. If the situation on the markets calms down and we see core market yields going up, we could see a similar move on the long end of the Polish curve. FRAs went down further and dropped below 1%, suggesting monetary easing in Poland. However, we continue to believe that monetary policy will remain stable in the coming months.

FX market drivers | EURPLN follows market fears

The zloty remains solely under the influence of the spread of the Coronavirus and the development of the EURUSD pair. The expectations for US rate cuts are the main driver behind the EURUSD development. The meeting of the ECB Council could trigger a movement of the pair, should expectations of a rate cut be disappointed. Therefore, we could see increased volatility on the EURPLN.

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