Poland: GDP structure - private consumption to remain pillar of growth

Unemployment rate should decrease further in October. Flash estimate of inflation is expected to ease to 1.7% y/y in November, due to base effect and weak growth of food prices. GDP structure should show that private consumption remains pillar of growth, while investments should recover further. Inventories could make positive contribution to surprisingly strong growth in 3Q18. Bond and FX market should remain stable this week and follow developments on core markets.

 

This week:

• November 27: Unemployment rate to drop further

We expect the unemployment rate to fall further to 5.6% in October. The market consensus sees the unemployment stable at 5.7%. Trends observed on the labor market are still favorable, despite the recent stabilization of wage growth and the unemployment rate. The good financial situation supports the high level of household spending.

• November 30: Headline inflation to ease in November

The market expects flash CPI to decrease to 1.6% y/y in November, from 1.8% y/y in October. In our view, the drop in the headline figure will most likely be smaller, as we see CPI at 1.7% y/y in November. The inflation is expected to ease, given the base effect and weak food price growth.

• November 30: GDP structure - private consumption to remain pillar of growth

Given the strong positive surprise of 3Q18 GDP growth, which arrived at 5.1% y/y, the GDP structure will be of great interest. In our view, private consumption should remain the pillar of growth and a further recovery of investment is expected. However, it is unlikely that a rebound of investment is the factor behind the surprise. We thus tend to think that the increase in inventories contributed positively to such strong growth in 3Q18. After the release of monthly indicators for October, our now-cast model suggests that the growth dynamics should remain robust at around 4.8-4.9% y/y in 4Q18. Based on the GDP structure, we will revise our FY18 and FY19 growth forecast accordingly.

 

Last week's highlights

• Industrial production arrived at 7.4% y/y in October, above our forecast and market expectations. Construction output came in at 22.4% y/y.

• Nominal retail sales growth accelerated to 9.7% y/y in October, surprising to the upside as well.

 

Bond market drivers

• 10Y yields fell by 10bp

Over the week, the 10Y yields followed the developments observed in other CEE countries as well as on the core markets and went down from 3.27% to 3.16%. The 10Y yield on the German Bund decreased from 0.39% to 0.33%. As a result, the spread vs. the 10Y Bund narrowed from 287bp to around 280bp. Currently, the spread stands slightly above the one-year average. This week, local macro releases should not have any major impact on the bond market. Further on, the upcoming vote on the Brexit deal and ongoing conflict between the EU and Italy over the budget might keep up the pressure on the core markets.

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

Last week, the regional LCY bond market reported an overall positive performance of 0.6% (in EUR). In Poland, the LCY bond market performance was supported by the appreciation of the zloty and a 10bp decline in yields. In Hungary, the positive performance was due to a significant drop in yields, the 10Y yield fell by almost 20bp throughout the week. In the remaining countries, the performance was also positive, but the total return was not as impressive as in the case of Poland and Hungary.

 

FX market drivers

• Zloty pared recent losses

At the beginning of the week, the zloty remained rather weak and the EURPLN went above 4.33. Toward the end of the week, the pressure on the zloty eased and it managed to pare recent losses, as it went below 4.30 vs. the EUR. In our view, the recently increased volatility on the EURPLN was mainly due to the corruption scandal including the head of the Financial Supervisory Authority. This week, releases (Eurozone CPI) should be neutral for the EURUSD, and hence the zloty should remain stable around 4.30 vs. the EUR.

 

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