Exports growth rate collapsed in Q1

Final GDP reading above the flash estimate

In accordance with GUS data published today, GDP growth rate stood at 5.2% YoY in Q1 vs. 4.9% in Q4 2017, running above the flash estimate released earlier (5.1%). Seasonally adjusted GDP increased by 1.6% QoQ in Q1 vs. a 1.0% increase in Q4.

Increase in inventories – is it good or bad?

The main factor behind the acceleration of economic growth was higher contribution of change in inventories (1.9 pp vs. 0.1 pp in Q4 2017). The marked change in this category is difficult to interpret unequivocally. On the one hand, it might indicate an early recovery stage in the business cycle – expecting robust economic growth in the future, companies create an inventory buffer to be able to satisfy increased demand for their products in the future. On the other hand, an increase in inventories may also occur in the late recovery stage of business cycle – a sudden drop in demand surprises companies, leading to the accumulation of unsold products. The second interpretation seems more plausible to us. This view is supported by strong decrease in exports growth rate (down to 1.1% YoY in Q1 vs. 8.2% in Q4) which signals the weakening of foreign demand owing to a GDP slowdown in Poland's main trading partners (see MACROmap of 30/4/2018). Despite a simultaneous deceleration in imports (from 8.9% YoY in Q4 down to 3.3%), the contribution of net exports decreased by 1.2 pp in Q1 compared to Q4, which was the main factor hampering economic growth in Q1.

Slight deceleration of private consumption growth

Private consumption recorded a slight deceleration in Q1 (down to 4.8% YoY vs. 5.0% in Q4), which was consistent with lower dynamics of real wage fund in Q1 (employment times average wages) in the national economy. However, due to an increase in the weight of private consumption in GDP between Q4 and Q1, the contribution of consumption to GDP growth rose to 3.0 pp in Q1 vs. 2.5 pp in Q4, hitting the highest level since Q4 2008.

Public sector drives investments

The factor which limited the scale of the acceleration of economic growth were investments. Their dynamics rose to 8.1% YoY vs. 5.4% YoY in Q4, however, due to decrease in the weight of fixed capital formation in GDP between Q4 and Q1, the contribution to GDP growth dropped by 0.5 pp. We believe that responsible for the acceleration in investment outlays were public investments implemented with the use of EU funds. In turn, corporate investment growth has probably decreased in Q1 compared to Q4, due to high base effect. This view is supported by lower dynamics in Q1 of investments of enterprises employing at least 50 people (see MACROmap of 28/5/2018). Based on data on construction-assembly production between January and March, households' investments growth rate in Q1 may be expected to be at a similar level as in Q4. In the next MACROmap we will present the medium-term scenario for investments in the coming quarters.

End of the recovery

Today's data support our scenario, in which Q1 2018 was the peak of the current economic cycle. In subsequent quarters we expect that the GDP growth rate will continue to be relatively high but will show a slight downward trend. Today's data pose an upside risk to our forecast of yearly average GDP growth in 2018 (4.3% YoY in 2018 vs. 4.6% in 2017). We will present our revised medium-term macroeconomic scenario on 11 June.

Today's GDP data are neutral for PLN and yields on Polish bonds.