Poland: Domestic demand remains main engine of economy
Investment growth visibly recovered. Inflation to move around target. Polish yield curve under global pressure. Global factors might limit appreciation potential of zloty.
The outlook for this year has changed significantly since the beginning of the year. The expected slowdown will most likely not materialize this year and inflation will be higher than previously anticipated. Strong performance of the real economy suggests that Poland remains resilient to the cloudier external environment. Investment growth eventually recovered, while private consumption should remain solid, supported by fiscal packages in 2H19. All in all, we have revised our FY19 growth forecast up to 4.8% and FY20 to 4.0%.
The tight labor market could eventually have translated into demand pressure, as core inflation went up close to 2%. As far as headline CPI is concerned, we see risks to the upside to our current FY19 forecast of 2.4%. Apart from the possible acceleration of food and transportation costs, the unfreezing of electricity prices for corporates as of July 2019 could add as much as 0.4pp to the headline figure beginning from 4Q19. All in all, despite stronger than expected growth and higher inflation, the MPC will most likely keep rates unchanged until the end of 2019 and possibly beyond.
We see possible risks to the downside to our current yield forecast. Due to the higher probability of hard Brexit in 2H19, German Bunds might remain under strong pressure and further decrease. Although a further decline of the curve cannot be ruled out, we think that the space for that is limited.
The EURPLN has been locked in a narrow range around 4.30 for almost a year. Domestic factors do not support the strengthening of the zloty. GDP is likely to sustain solid growth momentum while inflation remains under control. Hence, stability of rates is the most likely scenario this and next year. Global factors are likely to play a bigger role in shaping EURPLN development.