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2013: a year of challenges


2013-01-02



The substantial deterioration of Poland’s macroeconomic indicators in the second half of 2012 has meant that the country is looking to the new year with more worry than hope. In the absence of the kind of stabilisers that operated at the turn of 2008 and 2009, the Polish economy could find itself in the most difficult situation in the post-transition era. Unlike many other countries, however, it should be able to stay clear of recession.

Looking at Poland’s macroeconomic performance in the years since its transition to market economy, there were two downturns over this period during which GDP growth in the country stayed significantly below its medium-term trend. One came at the turn of 2001 and 2002, when growth slowed to 0.5% y-o-y in its weakest quarter and amounted to 1.2% for 2001 as a whole. The other was in 2009, when the pace of economic expansion hit a low of 0.4% y-o-y in the worst quarter and came to 1.6% in the entire year. Macroeconomic data for the second half of 2012 suggest that we could see a similar downturn this year. Indeed, 2013 could go down in history as the year in which Poland’s GDP grew at the lowest rate since transition, without however slipping into negative ground.

Few sources of strength

The far-from-optimistic forecasts for 2013 reflect an unusually long list of threats and problems facing the Polish economy, and a dearth of positive factors. I refer here to various processes and trends likely to impede or facilitate economic growth in Poland in the year ahead. Unlike during the first wave of the crisis (2008-2009), the latter are few and far between this time around. In fact, there is just one: the country’s flexible exchange rate and the fact that the zloty remains well below the point at which, according to exporters, export sales become unprofitable. In 2008, by contrast, the exchange rate was just one of a number favourable factors, which also included a growth-supportive fiscal policy, relatively stable consumption, high inflows of EU funds and the associated relatively high levels of investment. All these combined to make Poland the proverbial island of growth in crisis-stricken Europe.

From good luck to bad luck

Poland’s undisputed success in withstanding the first wave of the global crisis was partly the result of a happy coincidence of factors. The downturn came just as the country was experiencing historically high inflows of EU funds, and shortly after it implemented a major fiscal loosening (cuts in the personal income tax and in disability-benefit contributions) that boosted household after-tax income and consumption. It also coincided with preparations for the Euro 2012 football championship.

No such luck for the country in 2013. On the contrary: just as the eurozone, its main trading partner, is going through one of the worst periods in its economic history, Poland is entering a (widely predicted) slump in investments, following the completion of Euro 2012-related projects and with EU funds available within the current budget perspective becoming exhausted. The situation is exacerbated by the fact that under prevailing budgetary realities, the basic medicine for a downturn – a fiscal stimulus – is no longer available. The need to reduce the country’s budget deficit and public debt, while undisputable, means that counter-cyclical fiscal tools will not be applied this time around, and that the economic slowdown will be accompanied, not by fiscal expansion but by consolidation. Austerity-oriented government policies, weakness in investments, and foreign markets in the doldrums all make for an environment in which maintaining GDP growth is exceptionally difficult and the risk of recession becomes a real one.

Foreign markets hold the key

The first impulse that put the Polish economy onto a slower growth path was the turmoil on the global financial markets and the resulting economic downturn, initially in the United States and subsequently in Europe. Similarly, in looking for potential growth engines that could revive the Polish economy in the coming quarters, an anticipated recovery in the country’s main trading partners seems to offer the best hope. Without such a recovery it is hard to expect any uptick in investment activity or a resurgence of consumption, which crucially depends on labour market conditions. In other words, the durability of the current slowdown in Poland will depend on the performance of the eurozone economies. And since both market consensus and the European Central Bank expect the bloc to show clear signs of returning to positive growth in the course of this year, confidence in Poland should improve too in the final months of 2013.

Tough first half of 2013

Raiffeisen Bank Polska forecasts that the first six months of 2013 will be the most difficult period for the Polish economy, with GDP growth decelerating below 1% y-o-y and with domestic demand stuck well in negative territory. The economy will owe its continued, if sluggish, expansion to a positive contribution from net exports, projected to reach nearly 1.5-2 p.p. This will not be an indication of export strength, however. Rather, it will reflect a further softening of imports and domestic demand weakness. The biggest drag on GDP growth in H1 2013 will be investments. We reckon that, particularly early on in the year, investment activity could contract by almost 10% y-o-y, due among other things to a high base of comparison with the same period of 2012 (finalisation of Euro 2012-related projects). Indeed, it is hard to expect any major trend reversal on this front throughout 2013. Any growth impulses from the government’s new investment programme (Inwestycje Polskie) are likely to emerge only in 2014, and we might have to wait even longer for a major new influx of EU funds. Similarly, surveys of investment plans in the business sector indicate that the prevailing attitude is one of cutbacks and project delays. The economic outlook has to at least stabilise for companies to step up investment activity. Again, no improvement is likely before 2014.

Contribution to GDP growth in Poland (in percentage points), Q1 2005-Q4 2013

Consumption is the main question mark

In our view, the main source of uncertainty over Poland’s macroeconomic performance in 2013 is the level of consumption. In the third quarter of 2012 the country’s households reduced their spending on an unprecedented scale, pulling private consumption growth down to just 0.1% y-o-y, the lowest rate since transition. Several causes are responsible for the slowdown in consumption. First, labour demand remains weak, which in a context of rising economic activity levels is pushing the unemployment rate higher and dampening wage growth. Second, although wages continued to grow in nominal terms throughout 2012, the gains were being largely eaten up by high inflation. This, coupled with stagnant employment, has eroded the purchasing power of the wage bill, which is the main source for financing consumption. Third, the savings rate, i.e. the percentage of disposable income saved by the average household, has fallen to zero, indicating that this financial cushion allowing consumers to maintain spending is disappearing too. Fourth, the restrictive loan policies of banks and Poles’ deteriorating credit scores are making it more difficult for consumers to use loans to finance consumption.

Average gross monthly wage in enterprise sector in Poland (%, y-o-y), January 2005-November 2012

The slowdown of consumer spending that occurred in the second half of 2012 was greater in scale, and came earlier, than we had anticipated. We attribute this to the above mentioned factors. At some point, however, the tendency for households to cut back on spending could become, not just a symptom of weakness elsewhere, but a cause in its own right, leading to a negative spiral of demand contraction. Whether or not such a scenario plays out remains a major unknown, not least because economic forecasting is based in large part on historical precedent, and no such precedent exists in this case. Our baseline scenario assumes that the cut back in consumer spending will ease off in 2013, thanks to lower inflation (which will lift real wage growth back into positive ground) and the prospect of banks adopting a less restrictive approach to loans. And though private consumption will still grow by just 0.6% y-o-y, such a level of expansion should allow the Polish economy to avoid recession.

Key macroeconomic indicators for Poland, 2011-2013
e − estimate
f − forecast
GUS, RBPL, 2013
20112012e2013f
GDP real change (%, y-o-y) 4.3 2.1 1.2
Private consumption (%, y-o-y) 2.5 0.9 0.6
Gross fixed capital formation (%, y-o-y) 9.0 0.7 -2.9
CPI (%, average) 4.3 3.7 2.5
CPI (%, e-o-p) 4.6 2.8 2.5
Registered unemployment rate (%, average) 12.4 12.8 14.0
Registered unemployment rate (%, e-o-p) 12.5 13.3 13.9

Marta Petka-Zagajewska

Chief Economist, Raiffeisen Bank Polska

marta.petka-zagajewska@raiffeisen.pl



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