Poland: EU funds - key factor for growth next year

EU funds – key factor for growth next year. Domestic demand to remain pillar of growth. Policy rate to remain flat throughout next year. Global sentiment of high importance for yield development. No reasons for zloty to strengthen, according to an Erste Group report. 

This year, instead of accelerating growth, Poland faced a slowdown. Due to the substantially lower flow of EU funds, investment dropped visibly, weighing on the growth dynamics that we see at 2.4%, at the end. Next year, however, we expect growth to recover and the economy to expand by 3%. A pickup in EU funds-related investment is a key factor for GDP to rebound, especially as fiscal easing effects will begin to fade from 2Q17 onwards.

Although improving labor market conditions should support private consumption growth throughout the year, an increase in investment is a necessary condition for growth dynamics to accelerate above the 3% that we expect to see in 2H17.

Two and a half years of deflation ended in November and next year we expect the inflation rate to rise further. After a more pronounced increase in the headline inflation rate at the beginning of the year, we should see the inflation rate oscillating around 1% for the rest of the year, unless commodity prices grow more visibly.

Increasing inflation supports the stability of rates scenario, despite the slowing economy, and we expect the MPC to keep the policy rate flat at 1.5% next year. The short end of the curve should thus remain anchored around current levels, while the long end of the curve is likely to remain under the influence of global sentiment, in particular the pace of rate hikes in the US. The zloty should remain relatively weak.

See report here