Economy still awaiting biggest hit
The introduction of lockdown measures in mid-March and the slowing external environment due to COVID-19 weighed only to a minor extent on the performance of the Polish economy in 1Q20, as growth remained in positive territory (2.0% y/y). The biggest hit is yet to come, as we expect GDP growth to post a double-digit contraction in the second quarter. Monthly indicators suggest that economic activity likely bottomed out in April. Gradual easing of restrictions should translate into economic recovery. For the time being, we stick to our FY20 GDP growth forecast at -3.7%.
The deteriorating situation on the labor market as well as increasing uncertainty will weigh not only on private consumption, but also on investment activity this year. We expect private consumption to contract by 2.9% this year, while a double-digit drop of investments cannot be ruled out, in our view. With exports slowing more considerably than imports, we expect net exports to contribute positively to the overall growth figure.
In response to the crisis, the National Bank of Poland cut the target rate by 140bp to 0.1%, bringing it to the lowest level in the region. The current easing cycle came to an end, as MPC members communicated that the central bank does not intend to post negative rates. The NBP will continue using unconventional monetary policy, with the QE program being their main tool. So far, the NBP has bought PLN 94bn in Treasuries and state-guaranteed papers. We expect rates to remain unchanged at least until the end of 2021, while the QE program should continue throughout 2020.
Interest rate cuts and the QE program pushed yields towards historically low levels in Poland. The unexpected rate cut to 0.1% resulted in the 10Y yield dropping below 1.2% and the spread over the 10Y Bund narrowing to 160bp. However, improved global sentiment due to the gradual easing of restrictions in core countries resulted in a recent upward move of the local yield curve. In our view, further upward pressure cannot be ruled out, as economic prospects should improve and asset purchases will not support the low yield environment indefinitely.