Summary:

Polish Economy and Financial Markets.

In February's MACROscope:

• It is already the third quarter in a row when Polish economy is running in fifth gear. After 4.9% y/y GDP growth in 3Q17 and 5.1-5.3% y/y in 4Q17 (as implied by the flash full-year print of 4.6%), we think there are reasons to believe that the first quarter of 2018 will see again nearly 5% y/y expansion. It all takes place in an increasingly supportive external environment. Confidence surveys in the US and euro zone have hit new cycle highs and the optimism about the economic outlook has been growing. The IMF again revised up its economic forecasts for most economies, as did the European Commission in its winter edition of predictions. After the most recent data we lifted forecast for Polish GDP growth to 4.3% this year vs. 4.6% in 2017.

• What is important, the long-awaited investment recovery has finally started, as the reported 5.4% fixed investment growth in the full 2017 implies an impressive, nearly 12% y/y surge in the final quarter. We expect investments to keep growing this year, albeit at less impressive pace than recorded in 4Q17, as severe capacity constraints in the construction sector will put a cap on infrastructure development. Private consumption growth remains robust, near 5% y/y, and we see no reasons for a slowdown in this department in the coming quarters, as households' disposable income will be boosted not only by accelerating wages and employment, but also by higher pension bill (as we noted last month, it seems that many people decided to resume their professional activity very shortly after getting the pension eligibility). On top of that, export should continue rapid, double-digit growth fuelled by strong demand from the European Union, but it should be paralleled by almost equally fast import expansion (amid strong domestic demand), so on balance the foreign trade will be roughly neutral for GDP growth.

• Above-potential GDP growth and accelerating wages (outpacing productivity) will push core inflation higher, towards 2% at the year-end. However, the headline CPI inflation is likely to zig-zag during the year, not exceeding 2.5%, as the first and final months of 2018 will be influenced by very high base effects in food and fuels.

• The better the economic data and the tighter the labour market, the more dovish is the stance of the Polish central bank. In February the Monetary Policy Council has signalled quite clearly, in our view, that it is not going to change interest rates at least until the end of 2018. Even though the new inflation projection in March may show inflation breaching the target in the medium run, we think it will be not enough to start serious discussion about policy tightening. It seems the MPC members have to see it (inflation well above the target) to believe it. And it is probably not going to happen before the end of this year.

• The zloty lost some ground at the start of February due to rebound in dollar strength and we expect this correction to continue. The dovish MPC rhetoric and concerns about further equity market selloff may also weigh on the Polish currency.

• Debt markets saw quite substantial correction in recent weeks and we think that in the near term domestic yields may still remain under the upward pressure of situation on core markets. However, next month we see a scope for some rebound, as the speed of the recent upward move in yields seemed to be excessive. Dovish MPC and lower CPI in nearest months should weaken market speculation about looming rate hikes.