Poland Weekly Focus | Strong recovery on the way
We revise our FY21 and FY22 GDP growth forecast upwards. Government presented new program that includes tax reforms, increased healthcare spending and extension of child benefits. ‘Polish Deal’ will boost private consumption in 2022.
Upward revision of 2021 and 2022 growth forecast | We revised up our FY21 GDP growth forecast to 4.2% and FY22 forecast to 5.4%, reflecting recent developments and government announcements. Flash 1Q21 GDP growth arrived at -1.2% y/y (+0.9% q/q s.a.), proving the resilience of the Polish economy to COVID-19 restrictions, which affected the retail and services sectors and have been in place throughout 1Q21. Pent-up demand and the relatively good situation on the labor market will boost household spending this year. We expect private consumption to be the main growth driver and increase by 4.1% in 2021. On the other hand, the still high degree of uncertainty will weigh on investment growth, which we see at only 1.7% this year. In 2022, funds available within the EU Recovery Plan will boost investments, while household spending will further accelerate, supported by the improving labor market and recently announced government program.
Over the weekend, the Polish government presented a new program, the ‘Polish Deal’, which includes tax reform, increased healthcare spending (to 6% of GDP in 2023) and expansion of child benefits. The government plans to increase the tax-free amount to PLN 30K (from the current PLN 8K) and raise the second PIT rate to PLN 120K (from the current PLN 85K). Moreover, the health contribution will be increased to 9% and will no longer be deductible from the PIT base. Furthermore, changes in civil employment contracts are planned as well. All in all, the proposed changes will increase the disposable income of households and thus boost private demand, while further limiting the propensity to invest.
Bond market drivers | 10Y yield surged toward 2%. Over the course of the week, the long end of the Polish LCY curve went sharply up by 20bp to 1.9%, following regional and core market developments. While the 10Y German Bund went up by 10bp during the week, the long end of the Romanian curved shifted up by 25bp and the Hungarian by 34bp. As a result, the spread over the 10Y Bund widened visibly to 210bp, which is the highest since the outbreak of the pandemic last year. Despite the increased purchases of the National Bank of Poland, the upward pressure on the curve persists. Given the recent strong increase of yields along the whole curve, we revised up our yield forecast and now expect the spread against the German Bund to widen toward 240bp by the end of the year.
FX market drivers | Zloty followed regional peers. Surprisingly high inflation for April in Czechia and Hungary fueled market expectations for an earlier start to the monetary tightening cycle than was anticipated before. As a result, CEE currencies appreciated visibly, benefiting as well from a weaker US dollar. The zloty moved toward 4.53 vs. the EUR. We revised our EURPLN forecast and expect the zloty to appreciate marginally by the end of the year, conditionally on a stable monetary policy outlook. Recent comments from the Czech and Hungarian central banks suggest that the policy normalization in the CEE region might start earlier.