Poland: GDP growth to remain strong

The flash estimate of GDP should still point to strong growth of the economy in 2Q19, despite some warning signs that we have seen lately. We expect GDP growth to arrive at 4.6% y/y, with domestic demand remaining the main growth driver. The flash inflation reading should be confirmed at 2.9% y/y in July. Bond yields will most likely remain depressed and under global influence. The recent depreciation of the zloty might be capped by positive GDP data.

This week:

• August 14: GDP growth to remain strong

We expect the 2Q19 flash estimate of GDP growth to arrive at 4.6% y/y (1.0% q/q), marginally above market expectations that stand at 4.5% y/y. We have seen weaker industry and retail sales performance only recently. The strong figures from the beginning of the second quarter should keep the growth dynamics relatively high. We see the FY19 growth forecast at 4.8%, but the risks are tilted to the downside due to slowing global economic activity. Trade wars and looming recession among trading partners are negative for growth. On the other hand, the fiscal package will support private consumption and growth itself in 2H19 and domestic demand should remain the main growth driver. However we expect to see lower growth dynamics in the quarters to come. In our view, the 2Q19 GDP release will be neutral for the stance of the MPC.

• August 14: Final CPI reading for July

We expect that the flash CPI reading will be confirmed at 2.9% y/y (0.0% m/m). In recent months, inflation has been strongly influenced by robust growth of food prices, but the increase in services prices has been also significant.

• August 16: Core inflation to accelerate

Given the strong increase of services prices, core inflation will accelerate further and is expected to increase to 2.1% y/y in July.

Last week's highlights

• Governor Glapinski said in the interview that, in the event of a more significant slowdown in Poland, monetary loosening cannot be ruled out.

• MPC member Ancyparowicz is of the opinion that the financial supervisory authority should consider reducing the regulatory requirements for banks in order to neutralize the risks coming from FX loans.

Bond market drivers

• Polish 10Y yield followed core market development

Over the course of the week, the 10Y Polish yield went below 2% toward record low levels. It followed core market development, where the 10Y Bund went down to -0.6%. As a result, the spread vs. the 10Y Bund marginally narrowed from 260bp to around 250bp. Separately, the dovish comment from Governor Glapinski, suggesting a need for a rate cut in the event of a more severe slowdown, dragged the 12-month FRA down. The current level implies a 20bp cut by the NBP within a year. This week, local bond yields will remain under the influence of global factors and we do not expect that the flash release of 2Q19 GDP will have a significant impact on the long end of the curve in Poland unless the growth dynamics disappoint.

• Weekly performance of 5Y bonds (% in EUR)

Spreads of CEE government bonds above German Bunds could not stop shrinking last week, and this continues to be driven by global rate expectation developments. It seems that CEE bonds could even benefit from risk-off sentiment, as evidenced by the continued drop in yields on Friday, despite the huge increase in BTP yields in Italy after early elections in autumn became increasingly likely there.

FX market drivers

• Zloty continued to weaken

Last week, the zloty continued to depreciate, albeit at a slower pace than in the previous week. The EURPLN increased by 0.4% and went above 4.30. Upcoming flash 2Q19 GDP and inflation readings might cap the depreciation of the zloty this week. Moreover, this week's macro release on major markets could give some direction to the EURUSD exchange rate. The first estimate of German 2Q GDP is scheduled, but US CPI and retail sales data for July should be watched more closely.

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