Streszczenie:

Polish Economy and Financial Markets.

In May MACROscope:

• Flash GDP for the first quarter was well below our and market expectations. The slowdown from 4.3% in 4Q15 to just 3% YoY was most likely the result of weak investment activity, particularly in the public sector. While poor construction data in 1Q16 were already a negative indicator, confirmation of an above-one-percentage-point GDP slowdown is certainly a warning signal.

• The Polish Monetary Council emphasised in the statement after May's meeting that "the weakening in GDP growth in early 2016 was probably temporary, although the continuing uncertainty about economic conditions abroad is a risk factor for domestic economic activity". We also think that the most important risks for Polish economic growth are external, though if investments continue a downward trend, private consumption might not be able to offset this. This is particularly important in the light of the relatively weak performance of exports in 1Q16. For now, we maintain our forecast of GDP growth above 3% for the remainder of the year. This is supported by a strong labour market, improving consumer sentiment, and relatively high credit growth.

• The market has resumed pricing in monetary easing later during the year. The next decision in June (the last meeting of Governor Marek Belka) is relatively easy to predict. The following in July is more complicated, as the Council will have the new inflation projection available, which might be even more dovish than the previous one. However, we do not think that the new Governor, Adam Glapiński, will opt for additional easing at his first meeting as the MPC Chairman, especially given his recent comments on the need for the continuation and stabilisation of monetary policy. Therefore, we think the meetings after the holiday period (the MPC will not meet in August) will be more interesting. However, we would only expect a cut in interest rates if GDP growth falls (well) below 3% YoY.

• Moody's rating agency decided to keep Poland's rating unchanged. However, at the same time, the rating outlook was changed to negative from stable, which is undoubtedly a warning signal for the Polish government. As one could have expected, given Moody's methodology, the key drivers of the decision were fiscal risks (possible substantial increase in spending and lowering of retirement age), as well as "unpredictable policies and legislations" (issue of CHF-loans, conflict concerning the constitutional court). The next calendar day for rating action by Moody's is not far off and is scheduled for September 9th. By then, we should have more clarity on several of the above mentioned steps in the government's policy. That is why it made sense, in our opinion, to only cut the outlook and wait for government actions, while the risk of a possible negative impact was reflected in the outlook change.

• The Polish market reacted positively to Moody's decision, as some market participants expected a more (or much more) negative message and therefore the Polish zloty and bonds also gained (EURPLN below 4.37 and 10Y bond yield close to 2.90%). We think, however, that a further strengthening of Polish assets will be limited by many local risk factors. The three key bills to watch out for in the next few months include: 1. any new proposal on CHF-loans; 2. retirement age (not only the lowering itself, but also additional conditions such as minimum years of paying contributions and/or minimum pension needed to be allowed to retire); and 3. The budget for 2017 (which pre-election promises will be honoured and how these will be financed).

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