GDP still surprises to the upside

October inflation above GUS flash estimate

In accordance with final GUS data, CPI inflation decreased to 1.8% YoY in October vs. 1.9% in September, running in line with our forecast, above GUS flash estimate, and below the market consensus (1.9%).

Food prices drag inflation downwards

The main factor behind the decrease in inflation (by 0.1 pp) were lower dynamics of prices of food and non-alcoholic beverages, which decreased to 1.8% YoY in October vs. 2.3% in September. Its decrease resulted from lower growth rate of prices in the categories "fruit”, "milk, cheeses, and eggs”, "meat”, and "oils and fats”, largely due to last year's high base effects. The decrease in inflation resulted also from lower dynamics of energy prices (1.4% in October vs. 1.8% in September), whose decline, like in the case of food price dynamics, was related to last year's high base effects (last year's rise in the prices of fuel – see MACROpulse of 13/11/2017). On the other hand, conducive to higher inflation were higher dynamics of fuel prices (12.8% in October vs. 12.0% in September) and higher core inflation, which, according to our estimates, amounted to 0.9% YoY in October vs. 0.8% in September. The increase in core inflation resulted mainly from higher growth rates of prices in the categories "clothing and footwear” (-2.9% YoY in October vs. -3.3% in September), "recreation and culture (1.9% vs. 1.8%)”, and "restaurants and hotels” (3.1% vs. 3.0%). In subsequent months we expect further, weak increase in core inflation caused by moderate cost pressure resulting from growing costs of labour and energy.

Inflation increase to accelerate in 2019

Today's reading is in line with our inflation forecast for 2018-2019 (see MACROmap of 22/10/2018). We expect that inflation will decrease to 1.8% YoY in Q4 2018 vs. 2.0% in Q3, due to lower dynamics of the prices of food, fuels, and energy. We forecast that the increase in core inflation will have an opposite impact. In effect, in the whole 2018 inflation will decrease to 1.7% vs. 2.0% in 2017. In 2019 we expect inflation to increase to 2.2%, due to higher dynamics of food prices, higher core inflation, and lower dynamics of fuel and energy prices. A sharp fall of oil prices, which, after conversion to PLN, have dropped by ca. 25%, poses a downside risk to our forecast.

GDP clearly above market expectations

In accordance with GUS data published today, the economic growth rate has not changed in Q3 compared to Q2 and stood at 5.1% YoY, running clearly above the market expectations (4.7%) and our forecast (4.5%). Seasonally-adjusted quarterly GDP growth rate rose to 1.7% in Q3 vs. 1.1% in Q2. The GUS data are a flash estimate. Full GDP data including its structure will be published towards the end of the month.

In our view, the stabilization of economic growth rate resulted from higher contributions of investments and inventories as well as lower contributions of consumption and net exports. At the same time, we believe that consumption remained the main source of growth.

We believe that in subsequent quarters the economic growth rate will show a downward trend, mainly due to lower contributions of private consumption and investments (see MACROmap of 10/9/2018). Despite the better-than-expected GDP data for Q3, we maintain our forecast, in which the GDP growth rate will amount to 4.8% YoY in 2018 vs. 4.6% in 2017 and will drop to 3.5% in 2019. In our view, the stronger-than-expected GDP growth in Q3 will be offset in Q4 by the negative effect of the additional holiday (12 November). Furthermore, GDP dynamics in Q4 may be lower from our forecast (4.5% YoY) also due to a stronger than we had assumed deceleration of economic activity suggested by the latest results of business surveys (PMI – see MACROmap of 2/11/2018).

Today's data on October inflation and economic growth in Q3 are positive for PLN and bond yields.