Surprisingly good data from Poland (Daily analysis 14.11.2018)

Italy is confronting the Union. The issue of Brexit hits a climax. The zloty is stable after the best GDP data in 10 years and the fastest economic growth of Poland in the whole Union. The euro exchange rate is still close to 4.30, and the dollar is slightly above 3.80 PLN.

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.: US CPI inflation for October (estimates: 0.3% m/m and 2.5% y/y; excluding fuels and food 0.2% m/m and 2.2% y/y).

Italy's confrontation. Weak data from Germany

A relatively large number of events in the broader market, but for the time being none of them clearly disturb the current situation. To some extent, this is caused by the fact that some information works in the opposite direction (e.g. the situation in Italy and oil falls), and partly by the inflow of important reports in the following hours (meeting of Prime Minister May's cabinet on the agreement with the European Union).

It is worth noting that ignoring the Commission's recommendations concerning Italy's budget generates further events. It is likely that the Commission (perhaps already next week) will decide to impose the excessive deficit procedure on Italy because the declarations sent yesterday by the Ministry of Finance (to increase privatisation to 1% of GDP) are unlikely to convince Brussels. As a result, this dispute may be open for weeks or even months. Given the rising political temperature (elections to the European Parliament in May), the problems could accumulate, including the financial sanctions for Rome and the further radicalisation of Italian society.

The economic picture of the eurozone is also negatively affected by reports from Germany about the fall in GDP in Q3. The contraction of the German economy amounted to 0.2% Q/Q and annual growth was the weakest in four years and amounted to only 1.1%. Interestingly, Destatis wrote in the comment that weak data resulted not only from the worse external situation (exports went down) but also from the decline in household consumption. Development in the entire eurozone was in line with initial expectations (0.2% Q/Q).

A further fall in oil prices somewhat softens negative information coming from the common currency area. Although the eurozone is not particularly sensitive to oil prices, a 25% reduction since the last highs may reduce operating costs for households and businesses. A more profound effect of this process will probably only be visible at the turn of the current and next quarter.

Crucial hours for Great Britain

In the next few hours (at 3:00 p.m. the meeting of UK ministers with Prime Minister Theresa May begins), the terms of the agreement on Brexit (mainly the issue related to the transition period) will be settled. According to media reports, it is 500 pages long and has not been made available to the media. So far, ministers of the British government have familiarised themselves with it, as reported by the BBC before midday. It probably assumes that there is no hard border between Ireland and Northern Ireland or that Britain has close relations with the European Union.

Prime Minister May's cabinet must first accept the technical agreement between the EU and British negotiators. If this does not happen (opposition from hard-Brexit supporters), then the risk of the UK leaving the EU in a disorderly manner increases. The risk of changes in the prime minister’s position also increases.

It seems, however, that the Cabinet, despite the significant opposition, can accept May's plan. If so, a much more difficult process is ahead of us. The agreement would probably be put to the vote in the House of Commons in December. Here, there is a much greater risk of resistance from the more conservative Tories, members of the Northern Irish grouping (DUP) and virtually all labourists. Rejection of the agreement in December could mean the fall of May’s government, early parliamentary elections and even a new referendum. As a result, today we will have a taster of the tension that will culminate in a few weeks' time (assuming, of course, that the agreement will be accepted by the British Government today).

Polish GDP surprised

Poland's GDP growth for Q3 probably surprised most market participants. It amounted to 5.1% y/y, with the consensus by 0.5 percentage points lower. The seasonally-adjusted reading was even higher, which amounted to 5.7%, this was the best result since 2008. Tuesday's NBP presentation showed that the growth was expected to reach 4.6% y/y. Additionally, taking into account the Eurostat data on GDP published for most countries, the development in Poland was the fastest in the whole EU.

However, whenever such surprises occur, it is always worth asking what they are a result of and whether it is possible to maintain a fast growth rate in subsequent quarters. It seems that the surprises may result from an increase in stocks (currently a negative rather than a positive signal) rather than, for example, from a very clear acceleration of investments or positive events related to foreign trade. This also shows that it is practically impossible to maintain such a pace given the situation both domestically and abroad. All the time, we also believe that next year's decent result will be in the range of 3-3.5%, and today's surprisingly strong reading will in no way change the approach to monetary policy by the MPC, as it does not change much in the context of monetary policy.

Therefore, it is not surprising that the zloty did not react to the data. In addition, the Polish currency is still relatively stable, discounting the decent situation of the national economy for some time now. In the coming hours, the relation between the euro and the zloty should still be around 4.30, and the dollar will probably remain above 3.80 PLN.