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Q1 GDP data overshadowed by trade wars

Wide range of price increase

In accordance with the GUS data, CPI inflation rose to 2.2% YoY in April vs. 1.7% in March, running in line with the GUS flash estimate. Conducive to the indicator increase in April were higher dynamics of all its components (prices of food, fuels, energy and of goods and services included in the calculation of core inflation).

The dynamics of the prices of food and non-alcoholic beverages rose to 3.3% in April vs. 2.8% in March. The main reason for the faster growth of food prices were higher dynamics of the prices of pork from -2.7% YoY in March to 7.1% in April. Amid significant production losses observed in recent months due to the spread of ASF in China, we see a marked increase in the Chinese imports of pork, conducive to the increase of its prices worldwide, including Poland.

The prices of fuel and energy have jointly boosted CPI inflation in April by 0.1 percentage point. Higher dynamics of energy prices resulted from higher dynamics of the prices of electricity. We believe that it is a consequence of GUS taking into account to a greater extent the increase in the variable elements of electricity bills instead of only the decrease of the transitional fee imposed by the "bill freezing the prices of energy”, as was the case in previous months (see MACROpulse of 15/2/2019). On the other hand, higher dynamics of fuel prices resulted from the rising global prices of oil. The PLN price of Brent oil stood in March-April 2019 period at a level that was 11.3% higher than in the same period of 2018.

Core inflation signals higher cost pressure

The increase in inflation resulted also from higher core inflation which, according to our estimates, rose to ca. 1.8% YoY in April vs. 1.4% in March. Its increase was mainly caused by higher price dynamics in the categories: "housing” (higher prices for garbage removal), "transport" (higher prices of transport services), "communication”, "recreation and culture”, and "other expenditure on goods and services”. The wide range of the core inflation increase in March indicates that its source is the gradually growing cost pressure in the Polish economy. The growing inflationary pressure is also reflected by core inflation in monthly terms. The prices in this category rose by 1.0% in April, being the fourth highest monthly increase of the indicator since 1999.

In accordance with our revised forecast, we expect that until the end of 2019 the overall price dynamics will range between 2.2 and 2.6% YoY. They will be supported by a gradual increase in core inflation and faster growth of food prices, while lower dynamics of fuel prices, resulting from H2 2018 high base effects, will have an opposite impact. We believe that the adjustment of the price policy by enterprises (reflected by higher core inflation) will have concluded before the end of 2019 and thus headline inflation will show a weak downward trend in 2020. The inflation scenario outlined above supports our forecast predicting the stabilization of NBP interest rates in the whole of 2019 (first hike in March 2020).

Foreign trade boosted GDP growth in Q1

In accordance with the GUS data published today, GDP growth rate stood at 4.6% YoY in Q1 vs. 4.9% in Q4 2018, running above our forecast (4.4%) and the market consensus (4.5%). Seasonally-adjusted GDP rose by 1.4% QoQ in Q1 vs. a 0.5% increase in Q4. The GUS data are a flash estimate. Full GDP data including its structure will be published towards the end of May.

We believe that the main factor behind the positive surprise concerning the GDP estimate in Q1 was a higher-than-expected contribution of net exports. According to the yesterday's readings of GUS and NBP data on foreign trade, the export growth rate stood at a relatively high level while import dynamics have (unexpectedly) significantly decreased. Most likely, the acceleration of economic growth in Q1 was also driven by consumption, supported by strong labour market, record optimism of households, and anticipated wage increase resulting from social transfer payments. Despite the expected by us acceleration in investments growth, due to the reduction of weight of fixed capital formation in GDP between Q4 and Q1, their contribution to GDP growth has most likely decreased in Q1.

We believe that in subsequent quarters, the GDP growth rate will continue to be relatively high albeit showing a weak downward trend. Today's data do not alter our forecast of the average yearly GDP growth in 2019 (4.3% YoY in 2018 vs. 5.1% in 2019). The escalation of so-called trade wars (both between the US and China and between the US and the EU) is the main downside risk to our scenario.

Today's, consistent-with-the-flash-estimate final data on the April inflation are neutral for PLN and yields on Polish bonds. On the other hand, the higher-than-expected flash data on the Polish GDP are slightly positive for PLN and yields on Polish bonds.