Poland Weekly Focus | GDP growth to normalize in 3Q21
Flash estimate of 3Q21 GDP growth to land at 4.6% y/y but negative surprise stemming from net exports cannot be ruled out. Markets to digest last week’s decision of National Bank of Poland. We expect tightening to continue, which should support PLN.
November 13 | Flash estimate of 3Q21 GDP growth. We expect 3Q21 GDP growth to land at 4.6% y/y (1.6% q/q s.a.), slightly below the market consensus of 4.8% y/y. Following record-strong growth in 2Q21 (at 11.2% y/y), affected by the base effect as well as the strong recovery in the economy, economic growth should normalize in 2H21. In 3Q21, industrial production landed on average at 10.6% (vs. 30.8% in 2Q21), while retail sales stood at 10.2% y/y (vs. 19.3% y/y in 2Q21). We see risks to the downside to our forecast stemming from net exports, as the trade surplus deteriorated sharply over 3Q21, with imports outpacing export dynamics. Currently, we expect GDP growth to land at 5.0% in 2021 and to ease towards 4.8% in 2022.
Bond market drivers | 10Y yield locked at around 2.9%. The key event last week was the rate decision of the National Bank of Poland. The NBP raised the key rate by 75bp to 1.25%, again surprising the markets with the move, as an increase of 50bp was anticipated. Following the decision, the long end of the LCY curve jumped by more than 25bp to 3.1%. However, the move was short-lived and the 10Y returned to the range of 2.8-2.9% by the end of the week. The short end went up by 70bp and stands at 2.7%, the highest level in seven years. The interest rate outlook for Poland remains highly uncertain and will strongly depend on short-term inflation developments. As noted by the governor, inflation should peak in January and should decrease thereafter. The earliest inflation reading that might show a reversal of the upward trend is the February figure, which will be released in mid-March. Hence, we expect the NBP to raise rates at each of the next four rate-setting meetings, given the schedule of inflation publications. We expect the key rate to be at 2.5-2.75% by the end of 1Q22 and it should peak at 2.5-3.0% by mid-2022.
FX market drivers | Zloty not sensitive to rate hikes. The National Bank of Poland continues to surprise the markets, as it raised the key rate by 75bp to 1.25% in November. Despite the unprecedented move by the NBP, the zloty remains broadly unchanged at around 4.59 vs. the EUR. With inflation expected to peak at 7.5-8.0% y/y in January, the central bank will continue to tighten monetary conditions, but the scale of future adjustment remains highly unclear and will strongly depend on the short-term inflation development. The ongoing conflict with the EU over the rule of law is also negative for the PLN. Nevertheless, we expect the PLN to begin to appreciate, given the expected aggressive tightening in the coming months.