Poland to lower PIT from 18% to 17% as of 2020

S&P affirmed Polish rating at A-. Inflation rate confirmed at 1.7% y/y in March, suggesting uptick in core inflation. Labor market data and industrial output growth to be released this week, providing pretty complete picture of 1Q19 economic performance. After Easter, we will see retail sales growth. In Eurozone, we will see market sentiment indicators. We expect little volatility on FX and bond market.

This week:

• March 17: Employment to grow 2.9% y/y in March, while wages expected to go up 7.3% y/y
  Labor market trends have not changed much. Employment growth has maintained its 3% pace in recent months and we expect 2.9% y/y growth in March as well (in line with market expectations). At the same time, nominal growth of wages should arrive at 7.3% y/y. That would suggest slight acceleration of the underlying trend, which has been locked at around 7% for the last half a year.

• March 18: Industrial output growth expected at 4.1% y/y in March slightly below market expectations.
  The market sees industrial output growth at 4.5% y/y in March and is slightly more optimistic than we are. Growth at around 4% in March, however, would imply that growth of industry accelerated in 1Q19 compared to the previous quarter. Such good performance goes against market sentiment that has been consistently suggesting weaker expansion for more than half a year. A slowdown scenario does not seem close, as our Now Casting model for Poland implies GDP growth only slightly below 5% in the 1Q19.

• March 18: We see retail sales growth at 5.5% y/y in March down from 6.5% y/y in February.
  We see slightly lower retail sales growth in March compared to February and average growth of nominal retail sales slowing slightly in the first quarter as well. All in all, however, private consumption should remain the main driver of growth. The tight labor market supports high levels of household spending. On top of that, another round of fiscal stimulus is likely to give a further boost to retail sales figures in 2H19.

Last week's highlights

• S&P affirmed Polish rating at A- with stable outlook

• Inflation rate confirmed at 1.7% y/y in March.

• Poland to lower PIT from 18% to 17% as of 2020

Bond market drivers

• Polish 10Y yields steady at 2.9%
  The long end of the curve was holding steadily at around 2.9% for the whole week. At the same time, 10Y German bunds returned to positive territory, which resulted in a marginal narrowing of the Polish spread vs. Bunds. We do not expect any major changes on the bond market due to local factors, as there should be no major surprises. Inflation increased in March to 1.7%, while growth is expected to remain robust in 1Q19. The monetary outlook remains unchanged at this point.

• Weekly performance of 5Y bonds (% in EUR)
  The performance of the bond market in the region was mixed last week. Yields went down in the Czech Republic as spreads vs. Bunds have been quite wide already. Such development resulted in the highest total return (in EUR) in Czech Republic. Hungary was on the opposite side. In consequence of increasing yields, Hungary posted a capital loss. Romania also underperformed. In Poland, stability on the bond market led the total return to be determined by FX gains.

FX market drivers

• Zloty goes below 4.30 vs. EUR
  The zloty stood out slightly among CEE currencies, mildly appreciating last week vs. the euro. The US dollar fell last week which is usually beneficial for the zloty. In the short term, especially, we do not see domestic factors as supporting the local currency. We expect the EURPLN to continue to follow global sentiment.

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