Summary:

Polish Economy and Financial Markets.

In March's MACROscope:

• The pace of economic growth in Poland and abroad remains very decent, although the longer the expansion lasts the more questions about its possible demise arise. The introduction of US tariffs on steel and aluminum makes those questions even more valid, as the escalation of trade war could derail the global trade and growth outlook. But it is still to be seen how the situation develops. So far, we remain optimistic about the near-term outlook. Although the peak of the cycle is probably already behind us, it seems that the next quarters are not going to be much worse and we keep our GDP growth forecast for this year at 4.3% (vs. 4.6% in 2017).

• Although the general picture looks nice and rosy, there are a few scratches on it that deserve attention. The biggest one is the quickly growing labour shortage (vacancies up 51.5% y/y in 4Q17), which may be limiting companies' activity in some sectors. Some business surveys already reflect worsening of companies' output expectations. We think that the continuing inflow of workers from the Ukraine and changes in labour participation will be not sufficient to bridge the rising gap between the supply and demand for labour, and as a result the pace of wage growth will continue accelerating in the coming quarters, probably reaching double digits by the year-end.

• At the same time, the inflation environment still looks surprisingly benign, not only in Poland but also abroad. Despite rapid economic growth and tightening labour markets in Europe, 2018 began with a decline of inflation in most countries, and the ECB has just revised lower its medium-term inflation forecast for the euro zone. The Polish central bank did the same despite beefing up its predictions on GDP growth outlook. We still predict that the increasing wage pressure will push the underlying inflation in Poland higher, with core inflation ex food and energy climbing slowly towards 2% y/y this year. But at the same time, the CPI path may be subdued (well below 2%), especially in the nearest months and at the end of 2018.

• Such environment warrants longer stabilisation of NBP monetary policy, it seems. The new NBP projection saw core inflation mounting to 3% y/y by 2020 and yet for the NBP Governor Adam Glapiński it was a scenario justifying lack of changes in interest rates even until 2020. It apparently confirms that the Polish central bank will need a strong evidence of inflation persistently and significantly breaching the official target before it decides to take action. After the last MPC meeting we decided to delay the expected timing of first interest rate hike even further away, until November 2019.

• Despite the sound macro picture, the Polish currency has been under pressure recently, amid stronger dollar, shaky global market sentiment and very dovish MPC's bias. We still hold the view that the room for the zloty appreciation is limited. Lower scope for further positive surprises from domestic economy, higher global uncertainty, NBP interest rate hikes drifting further away and continuing Fed policy tightening would prevent EURPLN from falling significantly, in our view.

• On the debt market, lower inflation and dovish MPC should strongly support the short end of the curve in the coming weeks. The long end will be more vulnerable to global moods, but here we also expect to see good news, as diminishing inflation in Europe and worries about trade war affecting growth outlook should be supportive for European bonds.