Industrial output grew by 16.4% y/y in March (the strongest figure in 2 years) giving a clear sign that the Polish economy is picking up strongly this year. Our estimate is that first quarter growth might reach 5.0% y/y, due to strong exports performance and healthy domestic demand and might come in even stronger in the second quarter, due to a rebound in construction activity. At the same time, PPI grew by 0.9% y/y up from 0.7% y/y a month earlier and just 0.5% y/y expected by the market in March. Even though this was even more surprising than the strong industrial output result, we are not overly concerned that the accelerating economy is starting to generate inflationary pressure. The rebound in domestic demand is still at an early stage and the labor market conditions are improving at a moderate pace at most hence companies are likely to find it difficult to pass the increase in producer prices on to consumers.
The strong industrial output results together with the softer PPI numbers have crushed any remaining hope for a rate cut this month. The extremely benign inflation environment, coupled with strong data from the real side of the economy, continues to amaze and with the April MPC meeting just days away, the talk is whether more monetary easing could be on the way this year or not. The market still sees rates unchanged till the end of the year, while we believe this is far from certain.