Economic Analysis

In today's Eyeopener:

- Today detailed April CPI data and March balance of payments
- GDP growth slowed to 3.4% y/y in 1Q, below market expectations
- Stronger złoty and domestic bonds on Thursday but market sentiment worsened overnight

Between the release of the flash GDP estimate for 1Q (a slowdown from 4.1% y/y to 3.4% y/y) and 1 June, when we will learn what stood behind this weaker-than-expected growth, GUS offers a glimpse of how the economy entered 2Q. On Thursday, we will see April data on industrial output, construction output, as well as wages and employment. We will also receive data on price developments in April: core inflation (Monday) and PPI inflation (Thursday), along with the May consumer confidence survey results (Wednesday).

April CPI inflation was confirmed at 3.2% y/y and 0.6% m/m, unchanged from the flash estimate. Higher growth rates were recorded both in services (5.2% y/y vs 5.0% y/y in March) and goods (2.4% vs 2.2% y/y), while core inflation climbed to 3.0% y/y from 2.7% y/y, according to our estimates. We expect CPI inflation to increase further in May. If the oil prices remain elevated above US$100, inflation will likely approach 4.0% y/y. Our current forecasts show inflation peaking in May-June, though it should be underlined that the actual path of inflation will depend on the developments in the oil markets. The expected increase in inflation to 4% y/y will likely trigger hawkish statements from the MPC members and reinforce the pricing of interest rate hikes. To avoid rate hikes this year, July’s NBP projection will need to show that the increase in inflation above 4% is not permanent in nature and second-round effects will not materialise.

In mid‑March we published a report outlining three scenarios for the development of the economic outlook, depending on how prolonged and severe the commodity shock triggered by the war in Iran would prove to be. Three weeks later, we can conclude that the first scenario, which we had then considered the most likely, turned out to be overly optimistic, and the baseline scenario is shifting towards scenario number two: the conflict does not escalate further, but prolonged uncertainty and the damage already inflicted on infrastructure mean that commodity prices may remain at least 15–20% above their February levels for most of this year. Recent reports about an agreement on a two‑week ceasefire are interpreted by us as a clear signal that neither the US nor Iran is interested in further escalation or a prolongation of the war. (…)