The impact of the environment on the Group's results in 2018

Favourable external environment of the Polish economy

The external environment of the Polish economy in 2018 should continue to support the development of the Bank’s Group. The European political cycle in 2018 should be calmer than in 2017, and the key source of political risk should be the parliamentary election in Italy currently planned for March (other sources of political risk include continued negotiations on Brexit, the tension between the central government and the regional authorities in Spain or the prolonged process of forming the government in Germany). The growing imbalance on the asset markets is an additional source of uncertainty. The leading ratios indicate that the improvement in the economic situation that began in Europe at the end of 2016 should continue, and similarly to the second half of 2017, a greater role in the structure of the GDP growth will be played by internal demand, which indicates that the business cycle is entering a mature phase of expansion. According to the basic scenario, the GDP dynamics in the Eurozone should slow down slightly (to 2.3% in 2018 from 2.5% in 2017). In 2018, the continued economic expansion in Europe should be supported by the ECB maintaining a mild monetary policy. The increase in prices of raw materials (and inflation in general) could be a negative factor that would limit the real buying power of consumers and increase the cost pressure on enterprises.

The American economy should be supported by the tax reform enacted in December 2017 and the announced plan of infrastructural investments (the GDP dynamics in the USA will probably accelerate to 2.7% from 2.3% in 2017). The risk factors still include foreign exchange rate fluctuations and potentially the too high scale and pace of the Fed’s interest rate increases (according to Fed projections from December 2017, its members are expecting three rises in 2018) In the face of the considerable involvement of American households and firms in the capital market, potential strong or lasting drops on American stock exchanges could be an additional source of risk for the economy.

The increase in prices of raw materials is a positive factor for a number of emerging economies. In China, it is expected that the structural slowdown in economic growth will continue, but the good condition of the global economy and the reserves in the areas of fiscal and monetary policy should help avoid a “hard landing” scenario. Maintaining strong economic growth and the gradual strengthening of inflation bring about changes in the monetary policies of the main central banks. In the United States it is expected that interest rates will continue to be raised, and in the Eurozone a decision will most probably be made to close the programme of buying up QE assets (reinvestments of cash from maturing securities will be continued).

Stable economic growth

The year 2018 should bring continued economic growth on a level similar to the GDP dynamics in 2017. The structure of economic growth should continue to change towards a growing share in investments at the cost of the lower contribution of private consumption. Although the increase in investments should be stimulated mainly by an increase in expenditure in the public sector (intensification of the absorption of funds from the EU), the high utilization of production capacity and striving towards increased efficiency should also lead to a revival in private investments. Strong internal demand should have a positive effect on an increase in imports. Despite that, the contribution of net export to growth should remain slightly positive, thus reflecting a strong growth in the export of goods and a structural increase in overbalance in the exchange of services. The dynamics of private consumption may gradually slow down, thus reflecting the ending of the effect of the 500+ programme, which was smoothed down over time, and an increase in inflation. However, the heated up labour market and uncommonly good consumer moods should cause private consumption to continue to be a significant source of economic growth.

Situation on the labour market

The year 2018 will most probably bring a further growth of the imbalance on the labour market. Despite the continued strong growth in the demand for labour, the scale of employment growth will be more and more limited by supply-related factors (running out of the resources of available labour force). These factors will lead to a further increase of the salary pressure and acceleration of the nominal growth of salaries, especially in the corporate sector. The unemployment rate should maintain the downward trend, the strength of which should, however, be weak. The rate of registered unemployment as at the end of 2018 may go down below 6%.

The increase in CPI inflation

At the start of 2018, the CPI inflation will be reduced by the effects of the high base. From March 2018, inflation should return to the upward trend, and should exceed the NBP’s inflation target (of 2.5% y/y) about the middle of the year. The basic inflation reflecting, among other things, the increase in prices of services arising from higher labour costs, will be the main factor generating inflation growth. The upward trend of inflation should slow down in the second half of 2018, which to a large extent would be due to the statistical effects of the high reference base. It is expected that throughout 2018, the CPI inflation will remain within the limits of acceptable variances from the NBP’s inflation target, and at the end of 2018, it will amount to slightly less than 2.0% y/y.

Unchanged interest rates

Despite continued strong economic growth and inflation remaining close to the inflation target, the Monetary Policy Council will most probably leave the NBP interest rates unchanged throughout 2018. Arguments for the stabilization of interest rates include: the changed function of the MPC’s reactions (with a higher weight of GDP growth than in the past, and perceiving the current level of interest rates as neutral), strengthening of the zloty exchange rate, maintaining a stable surplus on the current account, a relatively stable situation on the housing real estate market and – so far – a lack of clear symptoms of the stronger salary pressure translating into inflation.

A stable growth in loans and a slowdown in the growth of deposits

The growing regulatory requirements (higher capital requirements, implementation of IFRS 9) in combination with limiting the interest rates on cash deposited on the NBP mandatory reserve account – mean that in spite of continuing economic expansion supported by a low level of interest rates (and a growing demand for loans), the dynamics of loans in the entire banking sector remains moderate. Despite a strong drop in the potential to expand the lending activity of the entire sector, the high demand may bring individual banks (with a higher level of own funds or those issuing subordinated debt) to grant loans more actively. The high payroll dynamics and the continued strong growth of (domestic and export) sales should contribute to a slight acceleration of deposits dynamics. The scenario of stable NBP interest rates means that we will probably continue to observe an outflow of the term deposits of households and the increased interest of households in alternative forms of saving, including shares, investment fund units and real estate.