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Weak ending to 2012 adds to concerns about economy


2013-02-05

In 2012 the Polish economy expanded at a rate of 2%, a substantial deterioration of performance as compared with the year before. The pace of GDP growth decelerated steadily from quarter to quarter, and the very poor macroeconomic data for December have only added to fears about the outlook for 2013.

Deceleration of GDP growth in 2012

According to preliminary estimates from the Central Statistical Office (GUS), in 2012 Poland’s gross domestic product grew by 2%, which represents a significant deceleration compared with the previous year. The result is broadly in line with market expectations.

The main engine of economic growth were net exports. The contribution of consumption was marginally positive while the contribution of investments was close to neutral.

Domestic demand rose by just 0.1% in 2012, compared with 3.4% in 2011. Private consumption went up by 0.5%, as against 2.5% the year before, while gross fixed capital formation rose by 0.6% (+9%).

GDP and its components changes in Poland (%, y-o-y), 2008-2014

Exports still outpacing imports

The relatively strong contribution of foreign trade to Poland’s GDP growth in 2012 is a reflection of the international competitiveness of Polish goods and services, but it is also a consequence of weakening imports. According to GUS, in the first 11 months of 2012 the country’s exports of goods (the GDP figures cover services as well as goods) were worth €131.4bn, while imports totalled €139.5bn. This translates into a nominal increase of 4.1% y-o-y and a decrease of 0.8% y-o-y, respectively. As a result, the country’s foreign trade deficit amounted to €8.1bn, compared with €14.3bn 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 sharply over this period, showing surpluses of €20bn and €18.5bn, respectively. The deficit in trade with developing countries decreased slightly to €16.9bn, whereas the deficit with the countries of Southern and Eastern Europe showed a small increase to €9.6bn.

Of Poland’s main trading partners, by far the highest increases in exports were to Russia (up by 25.8% y-o-y) and Ukraine (up by 22.1% y-o-y). Exports to Slovakia went up by 9.7% y-o-y, to Great Britain by 8.8%, to the Netherlands by 6.7% y-o-y, and to the Czech Republic by 4.4% 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, returned to positive ground with a slight increase of 0.2% y-o-y. On the other hand, exports to France decreased by 0.6% y-o-y, to Sweden by 3.5% y-o-y, and to Italy by 5.8% y-o-y.

As in previous months, the biggest increase in imports was also with Russia (up by 17.4% y-o-y), followed by the United States (up by 11.9% y-o-y). Imports from South Korea went up by 4.5% y-o-y, from China by 2.9% y-o-y, and from the Netherlands by 2.2% y-o-y. Imports from the remaining top-ten countries were lower than in January-November 2011. The smallest decrease was in imports from the Czech Republic (down by 2.3% y-o-y), followed by Germany (down by 5.6% y-o-y) and Italy (down by 5.7% y-o-y). Imports from France declined by 7.1% y-o-y and from Great Britain by 8.6% y-o-y.

Taking into account unfavourable statistical factors (fewer working days than in the same period of 2011), we estimate that foreign trade growth deteriorated significantly in December. Even so, net exports are bound to remain the main engine of GDP growth in Poland in 2013, especially if – as predicted by the market consensus – the situation in the eurozone starts to gradually improve around the middle of the year, generating higher demand for Polish goods.

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

Slump in industrial output

Reduced order flows and the unfavourable statistical factors referred to above were the primary factors behind a deep contraction of industrial output recorded in Poland in December. Activity in the country’s industrial sector tumbled by 10.6% y-o-y in the final month of 2012, a sharp deterioration compared with November. The result was below market expectations, which averaged -6.9% y-o-y.

Compared with the corresponding period of 2011, output was down in 30 out of 34 industrial sectors. Of the main sectors, only one registered an increase in output, namely electricity, gas, steam and air conditioning supply (up by 4.2% y-o-y). Output in the manufacturing sector dropped by 12.2% y-o-y, in mining-quarrying by 8.9% y-o-y, and in water supply, waste management and remediation activities by 3.3% y-o-y.

In the case of the country’s manufacturing sub-sectors, particularly significant output declines were noted e.g. in other non-metallic mineral products (down by 25% y-o-y), furniture (down by 22.6% y-o-y), motor vehicles, trailers and semi-trailers (down by 22.2% y-o-y), or computers, electronic and optical products (down by 19.3% y-o-y). Production of machinery and equipment slumped by 14.6% y-o-y, basic metals by 14.5% y-o-y, metal products by 14.4% y-o-y, rubber and plastic products by 11.8% y-o-y, coke and refined petroleum products by 10.6% y-o-y, chemicals and chemical products by 8.1% y-o-y and food products by 4.7% y-o-y. On the other hand, production of other transport equipment jumped by 32.7% y-o-y.

In 2012 as a whole industrial output was 1% higher y-o-y. We estimate that industrial activity remained firmly in negative ground also in January 2013, even despite a higher number of working days than a year ago and a slightly improved reading of the PMI index[2]. In our view, industrial 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 the year, as the eurozone economy starts to emerge from the crisis. We forecast that in 2013 industrial output will grow by 1.9%.

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

Very weak construction activity

Activity in the construction sector deteriorated even more sharply. Construction-assembly output contracted by as much as 24.8% y-o-y in December, a deepening of the downward trend that began in June 2012. Although the extent of the decline was compounded by fewer working days than in December 2011, the fact remains that after Euro 2012 construction activity in Poland collapsed.

Of the main construction segments, the worst numbers were recorded in construction of buildings, where output was fully 31.4% lower than in the same period a year earlier. But civil engineering and specialised construction activities also saw steep falls in output, by 21.5% y-o-y and by 19.7% y-o-y, respectively.

In 2012 as a whole construction-assembly output in Poland contracted by 1%. In light of the sharp deterioration of economic conditions and the consequent winding down of investment activity, and given that EU funds, which were the main funding source for many large infrastructure projects in recent years, are drying up, we expect the difficult situation in the construction sector to continue in 2013. According to our forecasts, in 2013 construction-assembly output in Poland will decline by 6%.

Significant increase in unemployment

The lowering of economic activity and the disappearance of many seasonal jobs are reducing demand for labour. In December average employment in the enterprise sector decreased by 0.4% to just over 5.47 million people. During the analysed period there were approximately 23,200 fewer people in work compared with November. In the 12 months to December average employment in the enterprise sector declined by 0.5%, i.e. by about 29,000.

At the same time, the number of people registered as unemployed by labour offices swelled by 78,700 in December, to nearly 2.14 million (an increase of 154,100 compared with the same period of 2011). As a result, the registered unemployment rate amounted to 13.4%, up by 0.5 p.p. compared with November and 0.9 p.p. higher than in the corresponding month of 2011.

We expect that the labour market situation will deteriorate even further in the months ahead, and that by the end of the first quarter of 2013 the official jobless rate will markedly exceed 14%, though it is likely to ease in the spring due to seasonal factors. And while the economy should start a gradual recovery in the second half of 2013, the anticipated revival is unlikely to provide any significant boost to the labour market until it gathers more momentum. Therefore we forecast that at the end of 2013 the registered unemployment rate will be 13.9%.

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

Meagre wage growth

The low demand for labour is putting a brake on wage growth, which has remained below 3% y-o-y in nominal terms for the past six months. In December the average gross monthly wage in the enterprise sector amounted to just under PLN 4,112 (approx. €1,004), up by only 2.4% compared with a year earlier. Though the figure exceeded market expectations (which were for a nominal increase of 2% y-o-y), it means that real wages in Poland have not moved during the past 12 months.

In January-December the average gross monthly wage in the enterprise sector grew by 3.4% y-o-y at current prices, which in real terms represents a decline in purchasing power of 0.2%. In the current economic conditions, one should not expect any acceleration of wage growth in 2013, though real wages could increase due to declining inflation.

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

Lower retail sales

Growing fears about job security and a contracting real wage bill[3] are increasingly weighing on consumption. In December retail sales at current prices decreased by 2.5% y-o-y[4], the worst result since April 2005. The figure fell short of market expectations, which were for an increase of 1.3% y-o-y.

In comparison with the corresponding period of 2011, sales were down in three of the main branch specialisations and up in five. The biggest drop was noted in sales of newspapers, books and other sale in specialised stores (down by 17.4% y-o-y), followed by sales of motor vehicles, motorcycles and parts (down by 12.4% y-o-y). Sales of fuels declined by 4.2% y-o-y. On the other hand, sales in the category of other retail sale in non-specialised stores jumped by 9.1% y-o-y, sales of furniture, radio, TV and household appliances increased by 6.8% y-o-y, sales of textiles, clothing and footwear edged up by 0.6% y-o-y, pharmaceuticals, cosmetics and orthopaedic equipment by 0.3% y-o-y and food, beverages and tobacco products by 0.1% y-o-y.

In 2012 as a whole retail sales rose by 5.6% at current prices, and by 2.3% in real terms. We estimate that retail sales growth fell deep into negative territory in January 2013 and that it will remain there until the spring, weighed down by a high base of comparison, the anticipated further deterioration of labour market conditions, and anaemic wage growth. According to our forecasts, in 2013 as a whole retail sales will rise by 3.1% at current prices.

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

Flagging inflationary pressures

The decline in consumption has been accompanied by a marked slowdown of consumer inflation. Two other factors besides weak demand worked in favour of lower inflation in the final months of 2012, mainly a high base of comparison and a stronger zloty. In December the consumer price index (CPI) eased to 2.4% y-o-y, dropping below the mid-point of the central bank’s target band of 2.5% y-o-y +/- 1 p.p. for the first time in two years. The figure was slightly below market expectations, which averaged 2.5% y-o-y.

The highest price increase in the 12 months to December was noted in housing and energy (up by 4.7% y-o-y), followed by food and non-alcoholic beverages (up by 3.9% y-o-y) and alcoholic beverages and tobacco products (up by 3.6% y-o-y). Prices in hotels and restaurants grew by 2.8% y-o-y and in education by 2.7% y-o-y. Lower-than-average price growth was noted in the category of transport, which includes car fuel (up by 1.1% y-o-y), in recreation and culture (up by 0.6% y-o-y) and in communication (0.1% y-o-y). At the same time, prices in the category of health decreased by 0.2% y-o-y and in clothing and footwear by 4.7% y-o-y. On a month-on-month basis the CPI was 0.1% in December.

In 2012 as a whole consumer prices rose by 3.7%. Despite a lower comparative base, we expect inflation to continue its gradual downward trend in the coming months. We forecast that in 2013 the average annualised CPI will be 2.2%.

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

Further decline in producer prices

Similar factors have been at work in the sharp slowdown of producer inflation observed during the past several months. In December the producer price index (PPI) amounted to -1.1% y-o-y, a deepening of the decline recorded in November. The market anticipated a PPI of -0.6% y-o-y.

Of Poland’s main industrial sectors, two saw declines in prices in December, namely manufacturing (down by 1.7% y-o-y), and mining-quarrying (down by 5.9% y-o-y). By contrast, prices in electricity, gas, steam and air conditioning supply rose 5.7% y-o-y and in water supply, sewerage, waste management and remediation activities by 2.8% y-o-y. On a month-on-month basis the PPI amounted to -0.6%.

In January-December producer prices grew by 3.3% y-o-y. In light of the softness of economic activity and considering a high base of comparison from a year earlier, we expect the PPI to remain at its current low level in the months ahead. We forecast that in 2013 average annualised PPI inflation in Poland will only slightly exceed 1%.

Producer price index in Poland (%, y-o-y), December 2011-December 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 January the PMI index for Poland’s manufacturing sector improved from 48.5 points to 48.6 points. However, it was another consecutive month that the index remained below the 50-point barrier separating expansion from contraction.

[3] In December the wage bill in the enterprise sector contracted by 0.5% y-o-y in real terms.

[4] At constant prices, retail sales decreased by 3.6% y-o-y in December.



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