Economy to brake due to virus threats
The rapid spread of SARS-CoV-2 in Europe and the broad preventive measures that have been undertaken by governments will strongly weigh on economic activity in the Eurozone and Poland. Based on the assumption that the Eurozone will be in recession this year, we have revised our GDP growth forecast for Poland down to 1.2% this year and to 1.4% in 2021. We expect the central bank to cut rates by 50bp to 1.0% in order to support the economy as it is being hit by the virus.
We think that the services sector will be hit the most by the temporary lockdown and that this will translate into lower private consumption. A visible decline in household spending on transport, education, recreation and culture, restaurants and hotels as well as durable goods will translate into sluggish consumption growth of 0.8% in 2020. Increased market uncertainty and potential disruptions in global value chains will also influence investment activity that is set to cool down to a meager 0.7% this year.
For the time being, we keep our inflation forecast at 3.6% this year. However, the recent strong drop of the oil price and slowing economic growth poses downside risks to our forecast. On the other hand, unfavorable weather conditions could result in food prices remaining on elevated levels in the coming months.
The course of monetary policy in Poland has changed significantly due to the spread of SARS-CoV-2. According to the latest comment from Governor Glapinski, he will suggest a rate cut to the MPC. We expect a 50bp cut at the meeting on March 17 or at the next MPC meeting in April. However, monetary loosening in light of the current supply shock may have limited effect on real economic activity, but could affect market sentiment. We think that the scenario of further interest rate cuts is conditional on a significant economic slowdown.