Poland Weekly Focus | Growth forecast remains unchanged
We keep our FY20 GDP growth unchanged at -3.7%. Despite introduction of lockdown in mid-March, economic growth remained solid in 1Q20. Zloty will follow global factors, while bond market participants will continue to digest last week’s rate cut.
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 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.
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.
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.