Rates and FX

In September's Rates and FX Outlook:
 

• Poland’s GDP growth failed to accelerate in 2Q16, with investments surprising negatively (-4.9% y/y), and we think that the second half of the year will see no significant improvement in economic growth. Although private consumption is likely to gain strength in the coming quarters, supported by solid labour income and the new child subsidies, it may take time until investments recover, and the positive impact of net exports will be hard to maintain (export growth may decelerate and imports accelerate). We expect a more significant investment pick-up next year, but by then the impact of the 500+ child benefit programme on consumption will be dissipating. Therefore, we forecast that GDP will grow 3.1% in 2016 and 2.9% in 2017. 

In September's Rates and FX Outlook: • Poland’s GDP growth failed to accelerate in 2Q16, with investments surprising negatively (-4.9% y/y), and we think that the second half of the year will see no significant improvement in economic growth. Although private consumption is likely to gain strength in the coming quarters, supported by solid labour income and the new child subsidies, it may take time until investments recover, and the positive impact of net exports will be hard to maintain (export growth may decelerate and imports accelerate). We expect a more significant investment pick-up next year, but by then the impact of the 500+ child benefit programme on consumption will be dissipating. Therefore, we forecast that GDP will grow 3.1% in 2016 and 2.9% in 2017. • Such a pace of economic growth should be quite surprising for the Monetary Policy Council. We point out that at its last meeting in July, the panel was confident that GDP growth would be significantly better than envisaged by the NBP project

The post-Brexit market turbulence did not last long. Growing hopes for more monetary stimulus by the main central banks triggered a rally in the bond markets with Polish bond yields falling to April lows and the spread vs the 10Y Bunds returning below 300bp. EM currencies also rebounded, although the zloty and the CEE region’s currencies gained less than, for example, their Latam counterparts. They were probably held back by worries about the looming economic slowdown in Europe as well as some country-specific risk factors (see below).

In July-August Rates and FX Outlook: • The post-Brexit market turbulence did not last long. Growing hopes for more monetary stimulus by the main central banks triggered a rally in the bond markets with Polish bond yields falling to April lows and the spread vs the 10Y Bunds returning below 300bp. EM currencies also rebounded, although the zloty and the CEE region's currencies gained less than, for example, their Latam counterparts. They were probably held back by worries about the looming economic slowdown in Europe as well as some country-specific risk factors (see below). • In our view, the risk for Poland's growth outlook is indeed rising – GDP growth in 2017E-18E may be closer to 3% than to the government-envisaged 4%. 2016E may also be weaker, as recent data disappointed (1Q only at 3%) and high-frequency figures for 2Q have signalled that the 2nd quarter may not be much better. Additionally, Brexit poses a risk for the Polish economy due to a direct impact through the trade channel amid high exposu

The GDP growth slowdown to 3.0% y/y in 1Q16 was stronger than expected, but we see growing evidence that the following quarters should be better, as economic growth should be supported by strong external demand (growth in the Euro zone, particularly in Germany, is doing fine) and accelerating private consumption (boosted by solid labour income and new child subsidies). Thus, we expect GDP growth in Poland to gradually accelerate, reaching nearly 3.5% on average in 2016. Deflation is surprisingly persistent, but we think that the CPI has already passed the trough, and over the coming months there should be a gradual pickup towards 0.5% y/y at the end of this year and 1.5% y/y at the end of 2017.