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GDP significantly below expectations

Final data on inflation in line with GUS flash estimate

In accordance with the GUS final data, CPI inflation decreased to 2.5% YoY in October vs. 2.6% in September, running in line with the GUS flash estimate equal to the market consensus and slightly below our forecast (2.6%).

The growth of vegetable prices is increasingly slower due to high base effect

The decrease in inflation in October resulted from lower dynamics of the prices of fuels (-4.8% in October vs. -2.7% in September), food and non-alcoholic beverages (6.1% YoY vs. 6.3%), and energy (-1.7% vs. -1.6%). The main reason for the decrease in inflation observed for the last two months in the category “food and non-alcoholic beverages” are lower dynamics of the prices of vegetables (16.3% YoY in October vs. 23.9% in September). Despite the crop failure caused by drought, conducive to a slower increase in prices in this category are last year’s high base effects. Decreasing dynamics of vegetable prices have been more than offset by increasing dynamics of the prices of fruit (12.6% YoY in October vs. 8.1% - due to lower harvest resulting from spring frost and drought) and meat (8.0% YoY vs. 8.1% - the effect of a deepening meat shortage in China resulting from the losses in the pig herd due to ASF). In accordance with our estimates, core inflation did not change in October compared to September and amounted to 2.4% YoY. Positive for the core inflation were higher price dynamics in the categories “furnishings, household equipment and routine household maintenance”, “other expenditure on goods and services”, “alcoholic beverages and tobacco products”, “health”, “restaurants and hotels”, and “education”, while lower price dynamics in the categories ”clothing and footwear”, “housing, excluding energy”, and “transport, excluding fuels” had an opposite impact. Despite the stabilization of core inflation in October, it is worth noting that a slight increase was recorded in most of its categories. In our view, this points to an increasing inflationary pressure in the Polish economy, which is consistent with our scenario assuming its further growth in subsequent months.

The stabilization of core inflation is only temporary

We expect that inflation will be showing an upward trend in subsequent months and will amount to 3.3% YoY in Q1 2020, reaching its local maximum. The main factor conducive to increase in inflation will be the forecasted by us higher core inflation. Lower dynamics of fuel prices and increasingly slower growth of food prices will have an opposite impact. Our forecast assuming a gradual decrease of inflation from Q2 2020 is consistent with our scenario, in which interest rates in Poland will remain stable at least until the end of 2020.

GDP growth clearly below expectations

In accordance with the GUS data published today, GDP growth rate dropped to 3.9% YoY in Q2 vs. 4.5% in Q2, running clearly below our forecast (4.3%) and the market expectations (4.1%). Consequently, the annual GDP dynamics stood at the lowest level since Q4 2016. Seasonally-adjusted quarterly GDP dynamics rose to 1.3% in Q3 vs. 0.8% in Q2. The GDP data published by GUS are a flash estimate. Full GDP data including information about its structure will be published towards the end of the month.

It is difficult to clearly determine the reason for the disappointing Q3 GDP reading. A lower than expected contribution of net exports is the most likely culprit. A lower-than-expected GDP growth rate was also recorded in other countries of the region – Czech Republic, Romania, and Slovakia, which may suggest a global factor – the deterioration of situation in global economy. The slowdown in global trade and uncertainty about the global economic outlook may have adversely affected not only exports but also the investment climate in Poland, resulting in a sharper than expected slowdown in the growth of fixed capital formation.

Despite the fact that GUS has revised GDP growth in Q1 and Q2 upwards by 0.1 pp, the data on GDP in Q3 pose a downside risk to our forecast of economic growth for the whole 2019 (4.4% YoY). We will present our revised macroeconomic scenario after seeing the final data on GDP structure in Q3.

Today's data on inflation are neutral for PLN and yields on Polish bonds. In turn, the lower-than-expected data on GDP are negative for PLN and positive for bond prices.