How did Poland perform at end of 3Q21?

Real economy data for September is due this week in Poland. Labor market statistics show strong wage growth, while employment growth is expected to slow down somewhat. Industrial production to ease due to supply-side issues. Retail sales to remain solid.

Watch this week

October 19 – Mixed labor market data

We expect the September wage and employment growth statistics to show a mixed picture for the Polish labor market. While wages are expected to sustain strong close to double-digit growth dynamics, employment growth is expected to ease further. We see wage growth at 9.3% y/y and employment growth at 0.7% y/y, in line with market expectations. According to the preliminary data of the Ministry of Family and Social Policy, the unemployment rate dropped by 0.2pp to 5.6% in September.

October 20 – Industrial production to lose some steam

The manufacturing PMI for September dropped by more than expected, to 53.4 from 56.0, reflecting supply-side pressures and rising prices on the production side of the economy. Although the PMI is still above the margin of 50 that separates contraction from expansion, the sentiment was at the lowest point since February 2021. Local manufacturing sentiment deteriorated as well and was the lowest since April 2021. We see industrial production at 4.2% y/y in September, below the market consensus of 8.0% y/y. The calendar effect will be neutral for the figure. Separately, the producer price index is expected to exceed the 10% y/y margin and we see it at 11.2% y/y.

October 21 – Retail sales to remain solid

Improving consumer sentiment and a solid labor market continue to support retail trade. We are slightly more optimistic than the market, as we expect retail sales to increase by 11.9% y/y (6.3% y/y in real terms) in September. After this week’s publication of the real economy data for September, we will have a full dataset for 3Q21 and we will review our FY21 and FY22 GDP growth forecast. Given the slowing global recovery, supply-side bottlenecks, and surging prices, we see risks to the downside for our current growth forecast.

Last week’s highlights

• Flash inflation for September has been revised up by 0.1pp to 5.9% y/y (0.7% m/m). While services prices remained unchanged at 6.6% y/y, prices of goods went up to 5.6% y/y (from 5.1% y/y the previous month). FY21 inflation will likely land on average at 4.8%, while the FY22 inflation forecast could even be higher and could land on average above 5%.

• Core inflation landed at 4.2% y/y in September (up from 3.9% y/y in August).

• The current account deteriorated further in August, as the deficit widened to EUR 1.7bn (from EUR 1.6bn in July). Thus, the YTD balance turned into a deficit of EUR 0.1bn.

• The National Bank of Poland bought papers worth PLN 0.6bn at the QE tender.

Market developments

Bond market drivers – 10Y yield close to 2.7% as sell-off continues

Over the course of the week, the 10Y yield moved further up and increased by 25bp to almost 2.7%, reaching the highest level since May 2019. The aggressive tightening by the National Bank of Poland, which has been priced in since the beginning of October, pushed the long end of the LCY curve up by 55bp. The increase on the short end has been even stronger, as the 2Y yield went up by 100bp to 1.7%. The spread against the 10Y German Bund widened to 285bp and surpassed the level observed at the start of the pandemic in March 2020. On Wednesday (October 20), the National Bank of Poland will hold a one-day non-decisive meeting. On Thursday (October 21), the NBP will release the minutes of the October rate-setting meeting that brought with it the unexpected rate hike. The meeting minutes could provide more clarity about the next move of the central bank at its meeting in November. Currently, markets are pricing in up to a 60bp hike next month and up to 200bp within a year. Elsewhere, the MinFin plans to hold a switch auction on October 21. The first auction planned for October was canceled, likely due to unfavorable market conditions.

FX market drivers – Zloty fluctuates in a narrow range

Since the beginning of the month, the zloty has been characterized by increased volatility due to the unexpected rate hike by the NBP and the constitutional court decision about the superiority of Polish law over EU law. However, last week some stabilization in the range of 4.55-4.60 vs. the EUR was observed. The markets currently await the further development of the conflict between Poland and the EU and any information about the acceptance of the Polish recovery plan. Government spokesperson Mueller said in a recent interview that he expects the plan to be accepted at the end of the year. On Tuesday (October 19), PM Morawiecki will speak at the European Parliament about the current situation in Poland. The speech could indicate whether the government could try to solve the situation. On the other hand, clearer guidance about the monetary policy outlook in Poland would also support the PLN. If market expectations for further tightening of monetary policy were to be disappointed at the next rate-setting meeting, we could see the depreciation of the zloty, possibly toward or beyond 4.65 vs. the EUR. This week, the flash estimate of the October PMI data will be published for the Eurozone, Germany, and France. In September, sentiment in manufacturing and among service providers weakened unexpectedly sharply. Supply problems and weakening demand weighed on manufacturing sentiment. As global supply chain problems worsened in some areas since September, the PMIs are unlikely to improve in October. Separately, the central bank meeting in Hungary will likely bring another interest rate hike. We expect the policy rate to be raised by 15bp to 1.80%. However, a bigger hike cannot be ruled out, given the higher than expected CPI in September and the weak forint. 

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