EMEA Weekly: Polish Domestic Demand Weakening

We expect the Hungarian central bank’s (MNB) Monetary Policy Council (MPC) meeting next week to form a decision to continue its monetary easing. It is broadly expected that the central bank will ease monetary policy further and, for the seventh consecutive month, cut by 25bp, to 5.25%. We also expect a 25bp cut.

Looking ahead, further easing is expected, given the MPC is dominated by doves. This said, the case for further rate cuts has been strengthened by recent economic data. Following the very bad Q4 12 GDP number, the outlook for the Hungarian economy looks even gloomier. The preliminary release of Q4 12 GDP revealed a deep contraction, with GDP falling by 2.7% y/y in Q4, down from a fall of 1.5% y/y in Q3 12. It looks likely to us that the Hungarian economy will remain in recession this year. This is the main argument for the MPC to ease monetary conditions further. Additionally, a new governor will soon be appointed and he is likely to be more dovish than the outgoing governor Andras Simor. All indications are that there will be additional rate cuts despite inflation still being somewhat above the official target of 3%.

Polish economy continues to struggle
Next week’s data is not likely to bring much to cheer about in terms of the Polish economy. It was a star performer in 2008-09; when major crisis hit the rest of the world, the Polish economy kept growing. However, the Polish economy has slowed down significantly over the last year. There has undoubtedly been some spillover from the euro crisis, but it is notable that it is a relative sharp slowdown in domestic demand, in particular as it has caused the GDP slowdown over the last 1.0-1.5 years.

Next week we are due to get Polish retail sales data, which we believe is likely to confirm that the Polish consumer continues to hurt. We expect retail sales to have fallen 3.4% y/y in January – up from a fall of 2.5% y/y in December – accompanied by weak income growth, tight monetary and financial conditions and general worries about Polish growth prospects.

The weakening of Polish domestic demand is also likely to have weighed on Polish GDP growth in Q4 12. We expect it to have slowed to 1.0% y/y in Q4 12, down from 1.4% y/y in Q3 13.

Looking ahead, we expect growth to remain lacklustre in the coming quarters but expect a moderate recovery starting later in the year. We believe European and global growth is likely to pickup and hope the Polish central bank steps up monetary easing.

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