Poland: Growth forecast remains unchanged

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Forecast revision: GDP growth remains unchanged

After a careful overview of the available data and detailed GDP structure for 1Q20, we decided to keep our FY20 growth forecast unchanged at -3.7%. Despite the weaker than expected real economy data for April, the 1Q20 growth in annual terms proved to be stronger than we forecasted. However, the biggest hit is yet to come. Economic activity likely bottomed out in April (as evidenced by the double-digit drop in industry and retail sales growth) and the recovery will be gradual. We thus expect growth dynamics to plummet in 2Q20 by around 10% q/q.

The relaxation of measures since the beginning of May should support the recovery and economic activity should improve in the second half of the year, absent any second wave of the pandemic. Within the recovery plan recently proposed by the European Commission, Poland would be (tentatively) eligible for EUR 63.8bn (12.1% of GDP) in the form of grants and loans that could additionally boost investment growth. The situation on the labor market deteriorated in April and we expect the unemployment rate to increase further. Should the situation on the labor market deteriorate more severely, private consumption would remain subdued for a longer period of time.

The slowing economic growth and low oil prices will drag inflation down. We see CPI on average at 3.1% this year, due to particularly high inflation in the first quarter. The unexpected rate cut by the central bank moved Polish rates to the lowest level in the region and we believe they will stay there at least until the end of 2021. At this point, we do not see the central bank posting negative rates. The postponement of pension system reform cut PLN 13bn of budget revenues. Therefore, we see the budget deficit at 9.4% of GDP.

Last week’s highlights

• PMI index for May increased to 40.6.

• Central bank cut target rate by 40bp to 0.1%. The decision was unexpected, as we believed that the central bank would wait for a new inflation and growth projection (due in July) for further easing.
  The weaker than expected real economy data for April, recent strengthening of the zloty and change in growth expectations of the MPC members were the main factors behind the easing.

• According to the NBP's statement, the volume of bonds bought within the QE program reached PLN 90.8bn.

• 1Q20 GDP growth was revised up to 2.0% y/y (-0.4% q/q s.a.).

• The flash inflation reading for May came in at 2.9% y/y.

• The unemployment rate increased to 5.8% in April.

Market developments

Bond market drivers | Long end tumbles on rate cut

Ahead of the central bank meeting and subsequent rate cut, the 10Y yield remained broadly unchanged around 1.4%. The unexpected monetary easing by the NBP pushed the long end of the curve down below 1.2%. However, since then, we have seen a correction, as the 10Y yield moved towards 1.3%. The spread over the 10Y Bund narrowed and remains below 170bp. With no releases scheduled for this week, we expect markets to digest the last week's rate cut and a further increase along the curve cannot be ruled out. The QE operations are planned for June 10 and June 24.

FX market drivers | Weaker US dollar supports zloty

Over the course of the week, the zloty appreciated by almost 1.5% and broke the 4.50 mark vs. the EUR. Ahead of the central bank meeting, the zloty benefited from the weaker US dollar and global risk-on mood and moved towards 4.40 vs. the EUR. The unexpected rate cut by the central bank resulted in a weakening of the zloty, as it returned above 4.45 vs. the EUR at the end of the week. Yesterday's session brought further appreciation of the zloty and the EURPLN went below 4.40. Therefore, we see risks to our current forecast for the zloty, as further strengthening towards 4.35 cannot be ruled out. With an empty local calendar, the zloty will follow global news.

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