The seasonally adjusted annual GDP growth is the highest since 2007

In accordance with GUS data published today, GDP growth stood at 5.1% YoY in Q3 against 5.1% in Q2 and was in line with the flash estimate released earlier. Seasonally-adjusted quarterly GDP increased by 1.7% QoQ vs. 1.1% increase in Q2. The seasonally-adjusted annual GDP dynamics increased from 5.2% in Q2 to 5.7%, running at the fastest rate since Q4 2007. The significant difference between the dynamics of seasonally-adjusted GDP and non-adjusted dynamics was, in our opinion, mainly related to the investment cycle in local governments (see below).

Public investments have accelerated

In the structure of Q3 GDP, the strong acceleration of investment growth from 4.7% YoY in Q2 to 9.9% deserves special attention. Given that in Q3 the nominal growth rate of investments of enterprises employing at least 50 people remained stable (13.3% YoY vs. 13.9% in Q2), we estimate that in Q3 the contribution of public investment to total investment growth (we will discuss investments of "50+" corporates in greater detail in the nearest MAKROmap) significantly increased. We also do not rule out a higher contribution of housing investment to the total investment outlays. Public investment growth in Q3 was boosted by local government investment, carried out in the period preceding the October local elections. The contribution of total investment to GDP growth in the third quarter amounted to 1.7 pp and was the highest since the Q4 2014.

Consumption continues to be the main driver of economic growth

In Q3 there was a slight slowdown in consumption growth (to 4.5% YoY vs. 4.9% in Q2), which was in line with the slowdown in the real wage fund (product of employment and average wage) in the economy observed in Q3. Although the contribution of consumption to GDP growth has decreased to 2.7 pp from 2.8 pp in Q2, consumer spending remained the main driver of economic growth. On the other hand, the contribution of change in inventories to GDP dynamics increased from 0.0 pp in Q2 to 1.0 pp, which was in line with the results of business climate surveys signaling excessive inventories in enterprises in Q3. In our view, the increase in inventories contribution mainly resulted from a surprising downturn in manufacturing in the euro area (especially in the automotive industry - see MACROmap of 19/11/2018 and 26/11/2018). The contribution of net exports to GDP growth dicreased significantly (from 0.9 pp to -0.9 pp in Q3) due to a marked reduction in export growth with a slight acceleration in the growth of imports (in line with our scenario).

Upside risk to GDP growth in 2018

Better-than-expected data on Q3 GDP signal a slight upside risk to our forecast of economic growth in 2018 (4.8%). We still expect that in subsequent quarters GDP growth will gradually decline at the back of the slowdown in employment and consumption growth, short investment cycle in the enterprise sector and the high base effect stemming from elevated public investment in 2018. We will present our revised medium-term macroeconomic scenario, taking into account the negative impact of an extra day off work (November 12) on GDP growth in Q4, on December 10.

Fast economic growth amid low inflationary pressure

In our view, today's GDP data do not change short-term NBP interest rate perspectives. We still expect their first hike will take place in March 2020. The strong growth in economic activity is taking place in the environment of limited wage and inflationary pressure. This assessment is supported by the preliminary data on November inflation published today by GUS, indicating its significantly deeper than expected fall to 1.2% YoY from 1.8% in October, caused by a decline in food price dynamics and drop in core inflation. Combined with the strong fall in crude oil prices recorded in recent weeks, this data signals a downward risk to our inflation forecast in 2019 (2.2%).

Today's GDP and inflation data are slightly negative for PLN and bond yields.

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