Growing food prices boosted inflation
In accordance with GUS data, CPI inflation went up to 2.9% YoY in July vs. 2.6% in June, running in line with the GUS flash estimate and significantly above our forecast (2.5%) and the market expectations (2.7%). Thus, inflation has reached the highest level since October 2012. The inflation growth was driven mainly by higher dynamics of the prices of food and non-alcoholic beverages, which rose to 6.8% in July vs. 5.7% in June, hitting the highest level since May 2011.
The main factor behind the increase in total food prices were higher and record high dynamics of the prices of vegetables (32.4% YoY in July vs. 27.3% in June – the effect of last and this year’s drought). Noteworthy in the structure of food price growth is also the recorded in July further increase in the dynamics of the prices of meat up to 6.7 YoY from 6.0% in June (the effect of a sharp decline in pork production in China due to ASF, conducive to higher prices of pork and poultry) and a marked increase in the dynamics of the prices of fruits (from -4.3% YoY to 1.5%), signaling the beginning of a wave of increases of their prices resulting from this year’s drought and frosts.
Conducive to the increase in headline inflation was also higher core inflation which, in accordance with our estimates, amounted to 2.1% YoY in July vs. 1.9% in June. Core inflation has been showing an upward trend in recent months, which, coupled with the wide product range of its growth, points to a gradually increasing cost pressure in the Polish economy. We expect core inflation to increase further in subsequent months due to the changes in tariffs announced by numerous leading service companies.
On the other hand, conducive to a decrease in headline inflation were lower dynamics of the prices of fuels (0.7% YoY in July vs. 3.0% in June) and energy (-1.0% YoY in July vs. -0.9% in June).
Significant upside risk to our forecast of inflation in 2019
The data on the July inflation that have been published today signal a significant upside risk to our forecast of price growth in H2 2019 and in the whole 2019 (see MACROmap of 10/6/2019). The main source of this risk is higher than we expected dynamics of food prices. In the coming months inflation growth will be limited by a fall of fuel prices in annual terms, due to a decrease in oil prices recorded in recent weeks. We still expect that inflation will reach its local peak in Q1 2020 and in 2020 will decrease compared to 2019, largely due to this year’s high base effects resulting from the sharp increase in food prices. Such short-term inflation profile caused mainly by supply-side factors (namely beyond the monetary policy) is consistent with our scenario, in which interest rates in Poland will remain stable at least until the end of 2020.
Slower GDP growth despite acceleration in consumption
In accordance with the GUS data published today, GDP growth rate stood at 4.4% YoY in Q2 vs. 4.7% in Q1, running slightly below our forecast (4.5%) in line with the market consensus. Seasonally-adjusted GDP rose by 0.8% QoQ in Q2 vs. a 1.4% increase in Q1. The GUS data are a flash estimate. Full GDP data including its structure will be published towards the end of August.
We believe that slower economic growth in Q2 resulted from lower dynamics of investments due to a markedly slower growth of public investments and a slight slowdown of corporate investments growth. Consumption was also limiting GDP dynamics in Q2. We estimate that its growth in annual terms accelerated in Q2 mainly as a result of higher social transfers but its contribution to GDP growth has decreased due to the reduction of the weight of consumption in GDP between Q1 and Q2. We expect that the contribution of net exports to GDP remained positive in Q2. We believe that in subsequent quarters the GDP growth rate will continue to be relatively high albeit showing a weak downward trend. Conducive to slowdown of economic growth in H2 2019 will be lower dynamics of exports due to the downturn in global trade and in the Eurozone. Today's data do not alter our forecast of the average yearly GDP growth in 2019 (4.4% vs. 5.1% in 2018).
Today's, consistent-with-the-flash-estimate final data on the July inflation are neutral for PLN and yields on Polish bonds. On the other hand, the lower-than-expected flash data on the Polish GDP are slightly negative for PLN and the yields.
