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Economy continues to lose steam


2012-10-05

Latest data show that economic activity in Poland is steadily decelerating. The clearest signs that conditions continued to deteriorate in the third quarter are the slowdown in industrial output growth, continued slump in construction-assembly output, and further softening of retail sales. Another cause for concern is the weakening labour market, with shrinking employment and very slow wage growth.

Slower foreign trade

One of the earliest indications of a coming slowdown in the Polish economy was the significant deceleration of foreign trade observed almost since the beginning of 2012. Exports have continued to grow at a slightly higher rate than imports, however, thanks to which the contribution of foreign trade to GDP growth remains positive.

According to preliminary data from the Central Statistical Office (GUS), in January-July 2012 Poland’s exports of goods were worth €80.5bn, while imports totaled €86.6bn. This translates into a nominal increase of 3% y-o-y and a decline of 1.5% y-o-y, respectively. As a result, the country’s foreign trade deficit amounted to €6.1bn, compared with €9.7bn in the corresponding period of the previous year[1].

Poland’s trade balance with the countries of the European Union as well as with the wider category of developed countries, improved markedly over this period, showing surpluses of €11.7bn and €10.8bn, respectively. The balance with developing countries also improved, with the deficit narrowing by 7.2% y-o-y to €10.4bn. By contrast, the deficit with the countries of Southern and Eastern Europe increased by over a fifth to €6.6bn.

Of Poland’s main trading partners, by far the highest increases in exports were to Russia (up by 25.1% y-o-y) and Ukraine (up by 21.6% y-o-y). Exports to Great Britain and Slovakia went up by 7.6% y-o-y, to the Netherlands by 3.7% y-o-y, and to the Czech Republic by 1.7% y-o-y. Exports to Germany, Poland’s main trading partner accounting for just over a quarter of the country’s total exports of goods, returned to positive ground with an increase of 0.6% y-o-y for January-July, compared with a decline of 1% y-o-y in H1. At the same time, exports to France were down by 0.6% y-o-y, to Sweden by 6.3% y-o-y, and to Italy by 8.9% y-o-y.

The biggest increase in imports was also with Russia (up by 24.8% y-o-y), followed at a wide distance by the United States (up by 8.6% y-o-y). Imports from China were up by 1.7% y-o-y and from the Netherlands by 0.8% y-o-y. Imports from the remaining top-ten countries were lower than in January-July 2011. The smallest decrease was in imports from the Czech Republic (down by 2.3% y-o-y). Imports from Germany declined by 5% y-o-y. The biggest drop was recorded in imports from Great Britain (down by 10.7% y-o-y).

Although foreign trade accelerated slightly in July, the improvement was due to a lower comparative base rather than a recovery in demand. With the eurozone economy in crisis, new export orders are coming at an ever slower rate, while deteriorating domestic conditions are increasingly affecting imports. We do not expect this situation to change significantly in the coming months. We forecast that in 2012 as a whole Polish exports of goods will rise by 2.7%, and imports by 0.1%. As a result, the foreign trade deficit will amount to €12.3bn.

Foreign trade in Poland (%, y-o-y), 2004-2011 and January-July 2012

Sluggish industrial output

On the back of lower orders, industrial output is growing at an ever-decreasing rate. In August it rose by just 0.5% y-o-y, providing a negative surprise for the market, which had anticipated a less sharp slowdown, to about 2% y-o-y, even allowing for the higher comparative base.

Compared with the corresponding period of 2011, output was up in 19 (out of 34) industrial sectors. Of the main sectors, the highest increase was noted in manufacturing (up by 0.7% y-o-y), followed by water supply, waste management and remediation activities (up by 0.6% y-o-y), and electricity, gas, steam and air conditioning supply (up by 0.1% y-o-y). By contrast, in mining-quarrying production declined by 5% y-o-y.

In the case of the country’s manufacturing sub-sectors, tobacco products reported the best result for the sixth consecutive month, with output surging by nearly 17% y-o-y. Double-digit increases were also reported for textiles (up by 11.7% y-o-y) and for chemicals and chemical products (up by 10.5% y-o-y). On the other hand, production of coke and refined petroleum products declined by 12.3% y-o-y, pharmaceuticals by 9.1% y-o-y, motor vehicles, trailers and semi-trailers by 8.3% y-o-y, furniture by 7.1% y-o-y, and that of basic metals and of other non-metallic mineral products by 5.6% y-o-y.

In the first eight months of 2012 industrial output rose by 3.5% y-o-y. Although the biggest declines in August were recorded in export-oriented sectors, domestic demand is also showing growing signs of weakness. If we factor in the high comparative base, industrial output is set to show only very modest growth in the remainder of the year (it may even temporarily slip into negative territory). That this is a likely scenario is also suggested by the latest PMI for Poland’s manufacturing sector, which fell to 47 points in September, its lowest reading since July 2009 and the sixth consecutive month that it remained below the 50-point mark, which indicates a contraction of activity. Therefore we forecast that in 2012 as a whole industrial output will grow by only 2.7%.

Industrial output in Poland (%, y-o-y), August 2011-August 2012

Continued slump in construction sector

Conditions in the construction industry remained difficult in August, even despite a slight improvement compared with the month before. This is evident from figures for construction-assembly output, which contracted by 5% y-o-y, as against a decline of 8.7% y-o-y in July.

Of the main construction segments, only civil engineering saw an increase in output, by 4.6% year-on-year. At the same time, in construction of buildings and in specialised construction activities output decreased by, respectively, 13.3% y-o-y and 6.3% y-o-y.

In January-August 2012 construction-assembly output rose by 3.8% y-o-y. In our view, the sudden decline in output observed since June is primarily due to the completion of many infrastructure projects related to Euro 2012, which had been the chief driver of construction activity for more than a year (conditions in the housing construction sector also remain challenging, however). We expect the growth rate of construction-assembly output to remain in negative territory throughout the remainder of the year, weighed down by a high comparative base, financial difficulties among construction companies, and the gradual drying up of EU funds, which pay for much of public investment.

Negative tendencies on the labour market

Lower business activity means lower demand for labour. In August average employment in the enterprise sector declined by 0.1%, to just over 5.52 million people. During the analysed period there were approximately 6,600 fewer people in work compared with July. In the 12 months to August average employment in the enterprise sector has risen by about 2,000 people.

At the same time, the number of people registered as unemployed by labour offices increased by 11,500 in August, to just over 1.96 million (compared with a year earlier, the figure represents an increase of 109,400). As a result, the registered unemployment rate amounted to 12.4%, i.e. 0.1 p.p. higher than in July and 0.6 p.p. higher than in the corresponding month of 2011.

These data indicate that the situation on the labour market is worse than it was a year ago. We expect that as economic growth decelerates further in the months ahead, companies will be led to scale back employment more and more. There is thus likely to be a significant increase in the registered unemployment rate in the autumn, as seasonal jobs disappear. We forecast that at the end of 2012 the official jobless rate will be 13.2%.

Registered unemployment rate in Poland (%), August 2011-August 2012

Anaemic wage growth

With labour demand weakening and with the financial condition of companies deteriorating, wage growth has decelerated and remains meagre, in spite of a small acceleration compared with July. In August the average gross monthly wage in the enterprise sector amounted to just over PLN 3,686 (approx. €901), up by only 2.7% versus a year earlier. This means that in real terms, wages have shrunk by 1% over the past 12 months.

In the first eight months of 2012 the average wage went up by 3.9% y-o-y. Under the present economic conditions, no substantial acceleration in wage growth is to be expected in the remainder of the year, favourable base effects notwithstanding.

Average gross monthly wage in enterprise sector in Poland (%, y-o-y), August 2011-August 2012

Flagging retail sales

With the real wage bill shrinking[2], retail sales growth decelerated to 5.8% y-o-y in August (at current prices)[3]. The slowdown was in large part a statistical effect, however, reflecting a rise in the comparative base.

In comparison with the corresponding period of 2011, sales were up in six out of eight main branch specialisations. The highest increase was noted in sales of furniture, radio, TV and household appliances (up by 19.7% y-o-y), followed by other retail sale in non-specialised stores (up by 13.3% y-o-y). Double-digit growth, or close to it, was also recorded in sales of pharmaceuticals, cosmetics and orthopaedic equipment (up by 10% y-o-y) and fuels (up by 9.7% y-o-y). Sales of textiles, clothing and footwear went up by 6.3% y-o-y and food, beverages and tobacco products by 5% y-o-y. The two categories in which sales declined were motor vehicles, motorcycles and parts (down by 2% y-o-y) and newspapers, books and other sale in specialised stores (down by 13.9% y-o-y).

In January-August retail sales at current prices rose by 8.5% y-o-y. Considering the high base of comparison, deteriorating labour market conditions and falling household disposable incomes, Poles’ willingness to spend on consumption is unlikely to increase in the months ahead. Rather, it is likely to continue to weaken gradually. We forecast that in the whole of 2012 retail sales at current prices will rise by 7.4%.

Retail sales in Poland (%, y-o-y), August 2011-August 2012

Falling inflation

In line with deteriorating global economic conditions, moderating consumption growth and rising comparative base, consumer prices have eased, with the August consumer price index (CPI) down to 3.8% y-o-y, a continuation of the slowing trend from July. Even so, August marked the 20th consecutive month that inflation remained above the upper end of the central bank’s target band (2.5% y-o-y +/- 1 p.p.).

The highest price increase in the 12 months to August was noted in transport, a category that includes car fuel (up by 6.5% y-o-y), and in housing and energy (up by 5.6% y-o-y). Above-average price growth was also noted in food and non-alcoholic beverages (up by 5.3% y-o-y) and in education (up by 4.9% y-o-y). Prices in the category of health went up by 3.8% y-o-y, in beverages and tobacco products by 3.7% y-o-y and in hotels and restaurants by 3% y-o-y. Prices in recreation and culture rose 1.3% y-o-y, while communication charges inched up by 0.1% y-o-y. The only category to register a decline in prices in August was clothing and footwear (down by 5.1% y-o-y). On a month-on-month basis the CPI was -0.3%.

In the first eight months of 2012 consumer prices rose by 4% y-o-y. While inflation is likely to have quickened somewhat in September due to a lower base of comparison, we expect it to begin decelerating more noticeably in the coming months. We forecast that for the whole of 2012 the average annualised CPI will come in at 3.9%, and that inflation will return to the central bank’s target somewhere around mid-2013.

Consumer price index in Poland (%, y-o-y), August 2011-August 2012

Further slowdown in producer prices

The producer price index (PPI) decelerated even more sharply in August, to 3.1% y-o-y. Here too, however, fundamental factors were compounded by a very high comparative base.

Of Poland’s main industrial sectors, the steepest price increase (up by 5.8% y-o-y) was noted in electricity, gas, steam and air conditioning supply, followed by manufacturing (up by 3.1% y-o-y) and water supply, sewerage, waste management and remediation activities (up by 3% y-o-y). By contrast, the mining-quarrying sector saw a 2.9% y-o-y decline in prices in August. On a month-on-month basis the PPI amounted to 0.1%.

In January-August producer prices grew by 4.9% y-o-y. Since the base of comparison will continue to rise, we expect the marked slowing trend in the PPI observed during past few months to be maintained in the remainder of the year. According to our forecasts, in 2012 as a whole average annualised PPI inflation will be 3.6%.

Producer price index in Poland (%, y-o-y), August 2011-August 2012

Paweł Sionko

Senior Economist

PMR Publications

pawel.sionko@pmrpublications.com

[1] By way of comparison, in 2011 as a whole the trade deficit amounted to €15.9bn, i.e. approximately 4.2% of GDP.

[2] In August the wage bill in the enterprise sector contracted by 1% y-o-y in real terms.

[3] At constant prices, retail sales grew by 2.3% y-o-y in August.



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