Germany in recession, Poland surprises (Daily analysis 15.05.2020)

Consumer demand in China is weaker than expected, which may indicate how consumers in other countries will behave. Germany is facing a recession, with a 2.2% decline on a quarterly basis, while Poland is surprisingly down by barely 0.5%.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:30 p.m.: Retail sales in the USA in April (estimates: -12% m/m; -8.5% excluding vehicles).
• 3:15 p.m.: Industrial production in the USA in April (estimates: -12% m/m).

Consumption in China as a warning sign

On Friday, a series of interesting macroeconomic data was published. The Chinese statistical office published, among others, readings of industrial production and retail sales. These are interesting as they relate to April, so to some extent, they already include the gradual opening of the economy. Industrial production increased by 3.9% compared to April last year - more than 1.5% expected by economists and an improvement compared to March (-1.1%).

As the virus affected China first, it is also worth looking at the production in the January-April configuration: it has already decreased by 4.9% compared to the same period last year, but it is also less than expected (-5.4%). Therefore, the return to business activity is even faster than could have been expected, although it is potentially the easiest step in the opening of economies.

Demand, i.e. also consumer behaviour, remains a big unknown for any economy. Retail sales data may provide an indication here: although it was expected to fall (by 6.0%), it has again exceeded estimates, with a fall of 7.5% in April. This is a smaller drop than in March (-15.8%), and in January-April, the decline was 16.2%. Data from China may suggest that consumers in Europe or the US will react similarly cautiously, which may indicate a somewhat slower recovery path than currently expected.

The eurozone's GDP is not surprising, but that of Poland - yes

In the morning, data on GDP from Europe were also available. Europe's largest economy - Germany - shrank by 2.2% q/q, the sharpest drop in a decade. Although this was the median of the economists' expectations, the revision of the data for the Q4 to a decrease of 0.1% (from 0%) has already put the German economy irreversible into recession. Eurostat also published data for the entire eurozone. The 3.8% q/q drop was not surprising. However, a positive aspect was the GDP data for Poland (GUS also published them an hour earlier).

While we can speak positively of a 0.5% q/q drop in GDP, the drop was much lower than economists' estimates of -1.2%. On an annual basis, Poland recorded a growth of 1.9% (1.6% seasonally adjusted), which was also 0.2 percentage points above expectations. The expectations (including those of the European Commission in recent projections), according to which Poland would be one of the least affected countries in the whole EU.

These are good data for PLN in the context of the second part of the year

In the context of the coming months, these are two pieces of good news for the zloty. Although the data for Q2 will be crucial here, the information currently available indicates that the lowest point in Poland's decline in activity will not be so deep. The relatively (to other countries) low level of coronavirus cases may suggest that consumers will be slightly less cautious and demand may return relatively faster than in other economies. The increase in activity and the expected recovery support emerging country currencies (EM) by definition and the resilience of the Polish economy may support the return of the stronger zloty in the second part of this year and in 2021.

However, strong changes in sentiment, related to, among other things, the risk of a second wave of illnesses, US-China trade tension, the US presidential election and UK negotiations with the EU, may prevent the Polish currency from returning to a clear appreciation path. Until we observe a clear recovery in global economic activity, the dollar may remain relatively strong, and this will hamper strong appreciation of emerging countries' currencies.

Stable zloty and the weakening pound

The EUR/PLN exchange rate fluctuated around 4.555-4.565 and the USD/PLN exchange rate oscillated around 4.21-4.225. Later in the day, more volatility may be caused by data on retail sales in the USA, especially in the case of the dollar. Although here too, it seems that nothing should fundamentally change. The data do not include services, so they are not a perfect measure of consumer behaviour.

Given the fairly good macro data from Poland, potentially further monetary stimulation and possibly negative rates in the UK, the pound may gradually depreciate in relation to the zloty if there is no strong deterioration in general market sentiment, which would negatively affect the entire zloty basket. As the weeks pass, the subject of negotiating a new trade agreement with the EU (the current one expires at the end of the year) will become increasingly important for the pound. Today, nothing promises to be a quick and efficient process, which may put further pressure on the British currency in the global market.