Weekly Focus Poland
Unemployment rate up marginally in December, to 6.6%. This week, 2017 GDP to be published; we expect to see robust growth dynamics at 4.6%. Zloty strengthened and long end of curve moved up following surge in German yields after ECB meeting and relatively weak demand for Friday’s bond auction.
January 30: Economy expanded 4.6% last year (vs. consensus at 4.5%) Last year, GDP growth was robust and consumption-driven. We believe that growth dynamics could reach as high as 4.6% in 2017, as 4Q17 growth could have reached 5% y/y. Domestic demand was the pillar of growth, as private consumption growth was supported by the 500+ program in the first half of the year and accelerating wage growth in the second half. At the same time, investment activity has been rather sluggish, only showing signs of recovery at the end of the year. Net exports could have been the source of the positive surprise for growth in the second half of the year. All in all, we expect economic growth to sustain a solid but somewhat lower pace this year. If investment growth rebounds, however, and goes into double digits, there is room for a surprise to the upside and for growth above 4%.
Spread vs. Bunds comes back toward 290bp After a month of gradual narrowing of the spread vs. Bunds, at the end of last week it went back towards 290bp and the 10Y yield increased towards 3.60% on Monday. Development on the core markets, in particular the sharp increase of 10Y German yields towards 0.63% after the ECB meeting, was one of the reasons behind such an increase of the long end of the curve in Poland. Further, Glapinski’s comment that stability of rates may not persist in 2019 pushed expectations for a rate hike slightly up last week – that may have added to some of the pressure on yields. On top of that, relatively weak demand for Friday’s bond auction was also negative for yields. This week, GDP growth for 2017 will be published. We expect to see 4.6% growth dynamics; however, any positive surprise may add to pressure on the central bank to consider a rate hike sooner than currently assumed, as inflationary pressure is likely to rise.
Zloty extended gains The zloty remains in a strong appreciating trend as the EURPLN touched 4.14 last week – the lowest level for two and a half years. The zloty initially strengthened in reaction to PM Morawiecki's comment that gradual strengthening did not hurt the economy and that he does not see current EURPLN levels as hurting exports. The strengthening continued after the ECB meeting and the EURUSD pair moved closer to 1.25. This week, domestic data should be zloty-positive. Although robust growth is broadly expected, solid performance of the economy should sustain the EURPLN at relatively high levels. We also revise our EURPLN forecast. Given recent developments, we see the zloty moving in a sideways trend, with the EURPLN close to 4.15 at the end of the year.