Poland: US trip notes

The Polish economy is gradually slowing but GDP growth should remain resilient for the next 1.5 years; we forecast 4.2% YoY growth in 2019 and close to potential 3.3% YoY in 2020. The main GDP driver is the extended consumption boom, due to high election spending at about 2.2% of GDP gross (less in net terms as some new spending would be offset by new tax revenues, but not all – 1.3% of GDP are one-off revenues in 2020). Poland is also very resilient to a recession of German manufacturing and slowdown of overall economies in Eurozone. We attribute this phenomenon to a mix of factors, ranging from low reliance of Polish exports on non-EU markets (eg, Asia), which suffered strongly during recent trade wars. Polish input is less re-exported by German counterparties (than other CEE peers), it is rather consumers locally in Germany and the Eurozone. That makes Poland less sensitive to a German manufacturing recession due to resilient conditions in the Eurozone and German domestic demand. The recent evidenced of domestic demand softening there should start to affect Polish production and GDP. Still local election spending should last until 3Q20 and support domestic demand. We are rather worried about 2021 GDP growth. After the peak of election spending, EU-cofunded investments and German recession should hit the Polish economy with some lag. We think the PiS government would again deliver a spending boost, but rather via big public-private investments, partially funded by state governed utilities. More on the entire CEE resilience to Eurozone/German slowdown in the forthcoming ING Directional Economics to be released next week.

On CPI, our long-standing forecast assuming core CPI at 2.5% YoY in Dec-19 looks very near after a 2-3Q19 rise of prices. Headline CPI peaked in 3Q19 at 2.9% YoY and should temporarily drop in 4Q19 on base effects and reversal of food prices gains caused by the summer drought. Still, 1Q20 should bring another peak, with CPI flirting with the ceiling above the NBP target (2.5%+/-1%). The generous minimum wage hike (first out of a series of hikes, in 2020 by 15.6%) should add about 0.2-0.3pp to CPI in 2020. Still we do think the Monetary Policy Council should hold flat rates even if average CPI in 2020 reaches 4% YoY (not our scenario; INGF 2020 COI average 2.8% YoY).

The 2019 general government deficit should be sustained at a low level of 0.9% of GDP, despite aggressive pre-election spending. In 2020, the gap will be filled by one-off revenues, so the sector deficit should reach 0.5% of GDP. The post-election rationalisation of the 2020 budget (adding missing spending and deducting business unfriendly hike of pension contribution for most skilled) should cause an upward revision of 2020 net borrowing needs, but from an ultra-low (PLN7bn) to low (PLN15bn) level. On the other hand, household deposits should keep outpacing credit, so local banks are well funded and remain the main POLGBs buyers.

This favourable supply-demand condition calls for further tightening of the POLGB-Bund and asset swap spread in 2H19. In 2021, the supply-demand conditions should change, and the deficit should rise to 2.0-2.5% of GDP after the one-off revenues deplete.

We see two factors that could keep the Polish zloty slightly undervalued over the coming quarters, ie, Swiss (CHF) loans conversion risk and the sale of a local bank by a Eurozone financial institution; the buyer may be local so it should cover EUR/PLN shorts.