Last week, we met a group of about 20 London clients: a mix of hedge funds and some Asian names. During the roadshow, we expressed the following view on the Polish economy, currency and fixed income markets.
1 GDP outlook
We remain constructive on 2018 GDP but the outlook has become less upbeat. GDP peaked in 1Q18 at 5.2% year on year. In 2Q18 we expect GDP growth to slow to around 4.6% YoY due to the lagged effect of the eurozone's soft patch and the high base effect. We have downgraded our 2018 GDP forecast to around 4.4% YoY (with downside risk) from 4.6% YoY.
2 2Q surprise
In 1Q18, the euro area soft-patch had a negative impact on Polish exports (resulting in a substantial negative net trade contribution to growth). But this was masked by temporary factors such as a sharp rise of inventories and a shift of some consumption from 2Q18 to 1Q18 (due to an earlier Easter and the effect of the ban on Sunday retail trade). Leading indicators show 2Q18 may provide some negative surprises in the activity data.
3 Domestic demand
Domestic demand is expected to remain the key GDP driver, driven by strong public investment (nearly PLN290 billion of EU-backed projects have been accepted and public investment grew c.30% YoY in 4Q17). Private outlays should catch up, but the outlook has deteriorated recently, with a fall in newly planned projects. Factors which constrain private companies' propensity to invest include: a collapse in export orders, the side effects of a more rigid tax policy (a split VAT payment was recently introduced -freezing some working capital, and new quasi-taxes are coming on top of already rising labour costs).
4 Wage growth
The labour market continues to support consumption, with wages seen flirting with high single-digit growth in late 2018. Still, the transmission from wages to prices remains low due to a slowly rising gap between wages and productivity in Poland, and still subdued core eurozone CPI (although the picture in the eurozone has changed due to the weak euro and the jump in oil prices).
5 Monetary policy
Persistently low core inflation and weak private investment (as well as an increasingly less favourable external environment) are expected to reinforce the dovish central bank stance. We expect the bank to keep rates flat throughout the rest of its term.
6 Fiscal stance
The strong fiscal performance continues and while the proceeds from VAT have slowed temporarily, revenues from personal income tax and corporate income tax have accelerated. In tandem with subdued spending (i.e. due to high revenues from social contributions - the tight labour market helps) this suggests a 2018 deficit below 1.5% of GDP. Next year, the deficit may be higher (we expect 1.9% of GDP) due to looming parliamentary elections.