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Economy increasingly losing momentum


2012-12-05



In the third quarter of 2012 Poland’s GDP grew by just 1.4% y-o-y, confirming that the country’s economy has considerably decelerated. With the eurozone in recession and with domestic demand showing signs of major weakness, GDP growth could slow further in the coming quarters.

Low GDP growth in Q3

According to preliminary estimates from the Central Statistical Office (GUS), Poland’s gross domestic product amounted to just under PLN 392.1bn (approx. €94.8bn) in the third quarter of 2012, which in real terms translates into an increase of 1.4% compared with the same period a year ago. The result is below a market consensus of 1.7% y-o-y and compares to 2.3% y-o-y growth in Q2.

The main factor behind the deceleration of GDP growth in Q3 was a significant weakening of domestic demand, which contracted by 0.7% y-o-y (compared with a decrease of 0.4% y-o-y in Q2). This was due to weak gross capital formation, which made a negative contribution of 0.8 p.p. to GDP growth for the quarter. The contribution from consumption was slightly positive at 0.1 p.p., thanks to a marginal rise in private consumption and with a neutral contribution from public consumption. At the same time, the contribution of net exports remained positive at 2.1 p.p., reflecting a combination of a significant fall in imports (down by 3.7% y-o-y) and a minimal increase in exports (up by 0.7% y-o-y).

In the first three quarters of 2012, the Polish economy expanded by 2.4% y-o-y. The weak GDP growth figure for Q3 provides confirmation that economic activity in the country is decelerating at a rapid pace, even though seasonally-adjusted data are not as bad as the raw data (the seasonally corrected growth rate was 1.9% y-o-y). While the observed softening of public and business investment and decline in inventories were as expected, the extent of the slowdown in private consumption came as a major negative surprise. At present the sole remaining engine of economic growth in Poland are net exports, tough it should be noted that their positive contribution stems in part from lower imports (a consequence of flagging domestic demand), and not exclusively from continued solid demand for Polish products on export markets. Such a composition creates a considerable risk for GDP growth in the quarters ahead, particularly if the eurozone sinks into a deeper recession, as seems possible. (Until now resilient private consumption provided Poland with an effective cushion against weak external economic conditions.) And while the strong international competitiveness of Polish products is likely to soften the impact of deteriorating global demand to some extent, we should keep in mind that the exchange rate of the zloty is currently much less favourable for Polish exporters than it was during the previous downturn. Therefore we forecast that GDP growth in Poland will slow down below 1% y-o-y in the final quarter of this year, and that it will remain marginally positive also in the first three months of 2013. We expect an acceleration of economic activity only in Q2, helped by more favourable base effects and by a levelling off of the economic decline in the eurozone.

GDP and its components changes in Poland (%, y-o-y), Q1 2009-Q3 2012

Weaker exports continue to outpace imports

Although exports have been slowing steadily from quarter to quarter, they continue to outstrip imports. According to GUS, in Q1-Q3 2012 Polish exports of goods (GDP figures cover services as well) were worth €104.3bn, while imports totalled €111.4bn. This translates into a nominal increase of 1.9% y-o-y and a decrease of 2.6% y-o-y, respectively. As a result, the country’s foreign trade deficit amounted to €7.1bn, compared with €12bn in the corresponding period of 2011[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 €15.5bn and €14.4bn, respectively. The balance with developing countries also improved, though not as significantly, with the deficit falling to €13.4bn. By contrast, the deficit with the countries of Southern and Eastern Europe increased by almost a tenth to €8.1bn.

Of Poland’s main trading partners, by far the highest increases in exports were to Russia (up by 21.5% y-o-y) and Ukraine (up by 20.1% y-o-y). Exports to four of the top 10 export partners went up in January-September: to Slovakia by 6.7% y-o-y, to Great Britain by 6.4% y-o-y, to the Netherlands by 5.8% y-o-y, and to the Czech Republic by 1.4% 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, decreased by 1.3% y-o-y, as did exports to France. Exports to Sweden declined by 6.4% y-o-y and to Italy by 7.6% y-o-y.

As in previous months, the biggest increase in imports was also with Russia (up by 18.6% y-o-y), with the United States a distant second at 5.6% y-o-y. Imports from China inched up by 1% y-o-y and from the Netherlands by 0.5% y-o-y. Imports from the remaining top-ten countries were lower than in January-September 2011. The smallest decrease was in imports from Belgium (down by 2.6% y-o-y), followed by the Czech Republic (down by 4.8% y-o-y), Germany (down by 6.6% y-o-y), Italy (down by 8% y-o-y), France (down by 9.1% y-o-y), and Great Britain (down by 10% y-o-y).

Though latest indicators of economic conditions in the eurozone (including Germany) show a slight improvement, the level of economic activity in the monetary bloc continues to decelerate and the situation there will remain very difficult for several more quarters. This means that the bottoming out of the decline in new export orders in Poland’s manufacturing sector shown by the PMI index in November should not, in our view, be interpreted a sign of any quick recovery in external demand. Even so, foreign trade figures for October are likely to show a slight acceleration of export growth, thanks to a lower base of comparison and more working days than a year earlier.

Foreign trade in Poland (%, y-o-y), 2004-2011 and Q1-Q3 2012

Temporary uptick in industrial output

Despite weakening demand, industrial output recovered noticeably in October, following a substantial decline in September. It grew by 4.6% y-o-y, significantly ahead of market expectations (1.4% y-o-y).

Compared with the corresponding period of 2011, output was up in 27 (out of 34) industrial sectors. Of the main sectors, the biggest increase was noted in mining and quarrying (up by 11.3% y-o-y), followed by manufacturing (up by 4.7% y-o-y) and water supply, waste management and remediation activities (up by 4.6% y-o-y). Output in electricity, gas, steam and air conditioning supply rose 1% y-o-y.

In the case of the country’s manufacturing sub-sectors, the best result was achieved by producers of other transport equipment, with output surging by almost 24% y-o-y. Double-digit increases were also reported for textiles (up by 20.2% y-o-y), pharmaceutical products (up by 14.7% y-o-y), electrical equipment (up by 12.2% y-o-y), chemicals and chemical products (up by 11% y-o-y), and for paper and paper products (up by 10.2% y-o-y). On the other hand, production of basic metals declined by 8.4% y-o-y, motor vehicles, trailers and semi-trailers by 4.9% y-o-y, furniture by 4.5% y-o-y, leather and related products by 3.8% y-o-y and that of other non-metallic mineral products by 1.7% y-o-y.

In the first 10 months of 2012 industrial output rose 2.5% y-o-y. We believe that the better-than-expected production figures in October are not indicative of any turnaround in the economy. Just like the deep slump recorded in September, they are largely a blip caused by statistical factors and do not properly reflect economic conditions at the time. In October industrial output growth was supported by more working days than in the same month of 2011, i.e. a reversal of the situation in September, as well as by a somewhat lower base of comparison than the month before. And although output growth improved slightly in seasonally-adjusted terms as well (an increase of 0.6% y-o-y in October, compared with a decrease of 1.6% y-o-y in September), industrial activity in Poland remains weak.

While the slight improvement of the PMI index in November suggests a certain levelling off of negative trends[2], the near term outlook for the country’s industrial sector is not optimistic, either, in the context of recession in the eurozone and a noticeable weakening of domestic demand. In our view, while output growth might still hover around zero in November, fewer working days in December as compared with a year ago mean industrial production could fall well into negative territory in the closing month of the year, dragging the full-year figure below 2%. Output figures can be expected to improve from the spring of 2013 onwards thanks to more favourable base effects. However, a significant recovery is likely to occur only in the second half of next year, as the eurozone economy starts to emerge from the crisis.

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

Better construction figures also flattered by statistical effects

Statistical factors (more working days than a year earlier and a much lower comparative base than in September) were also responsible for the significant improvement in construction activity, which showed a modest decline of 3.4% y-o-y, compared with a slump of 17.9% y-o-y the month before.

Of the main construction segments, the best result was recorded in construction of buildings, where output was 7.5% higher than in the same period of 2011. By contrast, substantial decreases were noted in civil engineering (down by 9.9% y-o-y) and in specialised construction activities (down by 8.5% y-o-y).

In January-October construction-assembly output grew by 1.8% y-o-y. We expect the declines in construction-assembly output to deepen in the months ahead, due to a combination of negative factors, including a high base of comparison, tough situation on the housing market, weaker investment in both the private and public sectors, and the drying up of EU funds, which fuelled the infrastructure boom of the last few years. According to our forecasts, in 2012 as a whole construction-assembly output will be broadly flat as compared with 2011, and in 2013 it will decrease by 6% y-o-y.

Relative stabilisation on the labour market

The significant deceleration of economic activity observed in recent quarters has so far had only limited impact on employment figures. In October average employment in the enterprise sector declined by 0.1%, to 5.51 million people. During the analysed period there were approximately 3,700 fewer people in work compared with September. In the 12 months to October average employment in the enterprise sector edged down by about 1,400.

At the same time the number of people registered as unemployed by labour offices grew by 15,900 in October, to just over 1.99 million (an increase of 127,300 over a year earlier). As a result, the registered unemployment rate amounted to 12.5%, i.e. 0.1 p.p. higher than in September and 0.7 p.p. higher than in the corresponding month of 2011. Meanwhile, the unemployment rate measured according to the Labour Force Survey (LFS) remained at 9.9% in the third quarter, and was 0.6 p.p. higher than a year earlier.

The figures show that while the labour market situation is worse than it was a year ago and companies are very cautious about hiring, they are trying to avoid job cuts as far as they can. The relatively modest scale of the increase in the unemployment rate in October is also a consequence of government intervention: 49,800 people were covered by its active labour market programmes during that month, i.e. more than twice the number in October 2011.

In our view, the observed strengthening of negative tendencies in the economy coupled with a seasonal decline in jobs could lead to a more significant deterioration of labour market conditions and a more pronounced decline in employment in the months ahead. Therefore we expect that by the end of December the official jobless rate will hit 13.2%, and that it will remain at a heightened level throughout 2013.

Unemployment rate in Poland (%), January 2011-October 2012

Slightly faster wage growth, but real incomes still in decline

Weak labour demand and deteriorating company results are putting a brake on wage growth. Though wage growth in the enterprise sector accelerated slightly in October, to 2.8% y-o-y, taking the average gross monthly wage to PLN 3,718 (approx.€905), in real terms it remained in negative ground for the fourth straight month (down by 0.5% y-o-y).

In January-October 2012 the average wage went up by 3.6% y-o-y. Despite favourable base effects, the prevailing economic conditions mean that no acceleration in wage growth is to be expected in the coming months, though the real growth rate could slightly improve as a result of the anticipated easing of inflation.

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

Meagre growth in retail sales

With their real incomes in decline and amid growing fears of an economic crisis, Poles are increasingly cutting down on spending. In October retail sales at current prices grew by just 3.3% y-o-y[3], even despite more trading days than a year earlier. The result is somewhat below market expectations, which averaged 3.8% y-o-y.

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 the category of other retail sale in non-specialised stores (up by 18.1% y-o-y), followed by sales of furniture, radio, TV and household appliances (up by 16% y-o-y). Sales of pharmaceuticals, cosmetics and orthopaedic equipment grew by 6.9% y-o-y, and fuels by 5.9% y-o-y. Sales of food, beverages and tobacco products rose 1.3% y-o-y while sales of motor vehicles, motorcycles and parts edged up by 0.5% y-o-y. The two categories in which sales declined were textiles, clothing and footwear (down by 4.3% y-o-y) and newspapers, books and other sale in specialised stores (down by 15.3% y-o-y).

In the first 10 months of 2012 retail sales at current prices rose by 7% y-o-y. We expect retail sales to gradually soften further in the months ahead, due to a high base of comparison, an anticipated deterioration of labour market conditions, and falling disposable household incomes. According to our forecasts, retail sales will remain broadly flat in nominal terms until the end of 2012, but in early 2013 will move firmly into negative territory.

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

Inflationary pressures easing

Weaker consumer demand, a higher base of comparison, and a stronger zloty all contributed to a slowdown in consumer inflation in October, with the consumer price index (CPI) down to 3.4% y-o-y. It was the first time in 22 months that the CPI fell below the upper end of the central bank’s target band (2.5% y-o-y +/- 1 p.p.). The figure was in line with market expectations.

The highest price increase in the 12 months to October was noted in transport, a category that includes car fuel (up by 6% y-o-y), followed by housing and energy (up by 5.1% y-o-y) and food and non-alcoholic beverages (up by 4.7% y-o-y). Above-average price growth was also noted in alcoholic beverages and tobacco products (up by 3.7% y-o-y). Prices in the category of health rose by 3.2% y-o-y, in hotels and restaurants by 2.9% y-o-y, in education by 2.7% y-o-y, and in recreation and culture by 0.9% y-o-y. At the same time, communication charges dipped by 0.1% y-o-y, while prices in the category of clothing and footwear decreased by 4.6% y-o-y. On a month-on-month basis the CPI was 0.4.

In January-October 2012 consumer prices rose by 3.9% y-o-y. We expect consumer inflation to continue to decelerate in the coming months, helped not least by a very high comparative base. We forecast that in 2012 the average annual CPI will be 3.8%, and that inflation will return to the target around mid-2013.

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

Sharp slowdown of producer prices

There was an even sharper deceleration in producer inflation in October, with the producer price index (PPI) down to 1% y-o-y, marking a continuation of a downward trend lasting for several months. The figure was markedly below market expectations, which averaged 1.6% y-o-y.

Of Poland’s main industrial sectors, the steepest price increase (up by 5.9% y-o-y) was noted in electricity, gas, steam and air conditioning supply, followed by water supply, sewerage, waste management and remediation activities (up by 3.5% y-o-y). Prices in the manufacturing sector rose by 0.4% y-o-y. By contrast, the mining-quarrying sector saw a 0.5% y-o-y decrease in prices in October. On a month-on-month basis the PPI amounted to -0.7%.

In the first 10 months of 2012 producer prices grew by 4.1% y-o-y. We expect the PPI to stay low throughout the remainder of the year, due to flagging economic activity and a high comparative base. 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), October 2011-October 2012

Paweł Sionko

Senior Economist, PMR

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 November the PMI index for the manufacturing sector rose from 47.3 points to 48.2 points. However, it remained below the 50-point line demarcating accelerating from slowing activity.

[3] At constant prices, retail sales grew by 0.5% y-o-y in October.



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