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Will the Polish economy avoid recession?


2013-03-05

Recent macroeconomic figures were a positive surprise for the market. The higher-than-expected rate of GDP growth in the fourth quarter of 2012 indicates that the slowdown might be losing steam. And the January improvements in industrial output and retail sales have somewhat allayed fears about the performance of the Polish economy in Q1.

GDP growth decelerates, but by less than expected

According to preliminary estimates from the Central Statistical Office (GUS), Poland’s gross domestic product amounted to just over PLN 444.8bn (approx. €108.2bn) in the fourth quarter of 2012, which in real terms translates into growth of 1.1% compared with the same period a year ago. While the figure represents a deterioration compared with Q3, when the economy expanded by 1.4% y-o-y, it is better than market expectations, which were for an increase of 0.9% y-o-y.

The main growth-supporting factor were net exports, which contributed 1.8 p.p. to economic growth (according to national accounts, in Q4 exports grew by 2.5% y-o-y, while exports declined by 2% y-o-y). The contribution of domestic demand was negative at -0.7 p.p. Of this, consumption contributed -0.5 p.p., reflecting weakness in consumer spending, and gross capital formation -0.2 p.p.

GDP and its components changes in Poland (%, y-o-y), Q1 2009-Q4 2012

External demand will be key

The significant positive contribution, throughout the entire 2012, of foreign trade to Poland’s GDP growth was due to a combination of strong international competitiveness of Polish goods and services, and a concurrent weakening of imports. According to GUS, in 2012 Poland’s exports of goods (the GDP figures include services as well) were worth €141.9bn, while imports totalled €151.7bn. This translates into a nominal increase of 3.8% and a decrease of 0.6%, respectively. As a result, the country’s foreign trade deficit amounted to €9.8bn, compared with €15.9bn in 2011.

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 €21.1bn and €19.2bn, respectively. The deficit in trade with developing countries decreased slightly to €18.3bn, whereas the deficit with the countries of Southern and Eastern Europe showed a small increase to €10.7bn.

Of Poland’s main trading partners, by far the highest increases in exports were to Russia (up by 25.2%) and Ukraine (up by 21.5%). Exports to Great Britain rose by 8.5%, to Slovakia by 8.4%, to the Netherlands by 6.2%, and to the Czech Republic by 4.4%. Exports to Germany, Poland’s main trading partner accounting for just over a quarter of the country’s total exports of goods, were flat compared with 2011. At the same time, exports to France decreased by 1.2%, to Sweden by 3.7% and to Italy by 5.4%.

The biggest increase in imports was also with Russia (up by 17.7%), followed by the United States (up by 13.2%). Imports from South Korea went up by 3.6%, from China by 2.7% and from the Netherlands by 2%. Imports from the remaining top-ten countries were lower than in 2011. The smallest decrease was in imports from the Czech Republic (down by 2.5%), followed by Italy (down by 5.5%), France (down by 5.7%), Germany (down by 5.8%) and Great Britain (down by 8.1%).

We expect net exports to remain a strong engine of economic growth in Poland in 2013 as well, which will be paticularly vital now that private consumption is in negative ground and companies are suspending investments.

Foreign trade in Poland (%, y-o-y), 2004-2012

Recovery of industrial output

While economic activity in Poland is set to decelerate further in Q1 2013 amid weakening conditions and a high base of comparison, there are strong chances that GDP growth will remain in positive territory. This is all the more likely given that industrial output, which slumped badly in December, rebounded in the firsth month of this year to register an increase of 0.3% y-o-y. While the result was helped by statistical factors (more working days than a year earlier), it surpassed market expectations, which were for a decline of 2.7% y-o-y.

Compared with the corresponding period of 2012, output was up in 20 out of 34 industrial sectors. Of the main sectors, the highest increases in output were noted in mining-quarrying and in electricity, gas, steam and air conditioning supply (up by 4% y-o-y). Output in water supply, waste management and remediation activities went up by 2.3% y-o-y. At the same time, in the manufacturing sector production dipped by 0.4% y-o-y.

In the case of the country’s manufacturing sub-sectors, strong duble-digit increases in output were recorded in other transport equipment (up by 17% y-o-y), tobacco products (up by 12.1% y-o-y), or pharmaceutical products (up by 11.7% y-o-y). Production of textiles grew by 7.6% y-o-y, paper and paper products by 7.2% y-o-y and food products by 7.1% y-o-y. By contrast, production of computers, electronic and optical products contracted by 18.3% y-o-y, other non-metallic mineral products by 9.8% y-o-y, basic metals by 9.1% y-o-y, motor vehicles, trailers and semi-trailers by 6% y-o-y, beverages by 5.3% y-o-y, and wearing apparel by 5.2% y-o-y.

In 2012 as a whole industrial output climbed by 0.9%. We expect figures for industrial activity in February to show continued weakness, even despite the gradual upward climb of the PMI index[1] over the past few months. In our view, 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 rise by 1.9%.

Industrial output in Poland (%, y-o-y), January 2012-January 2013

Continued deep slump in construction sector

On the other hand, activity in the construction remained very weak, despite a slight improvement. Construction-assembly output contracted by as much as 16.1% y-o-y in January.

Of the main segments, the steepest drop was again recorded in construction of buildings, where output was 20.7% lower than in the same period a year earlier. Output in specialised construction activities also contracted sharply (down by 16.2% y-o-y), while the extent of the decline in civil engineering was more modest (down by 9.9% y-o-y).

In 2012 as a whole construction-assembly output in Poland contracted by 1.1%. In light of the significant 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%.

Sharp rise in unemployment

In January average employment in the enterprise sector increased by 0.6% to just under 5.51 million people, due to an annual adjustment of the sample. During the analysed period there were approximately 32,300 more people in work compared with December. Despite this, in the 12 months to January average employment in the enterprise sector declined by 0.8%, i.e. by about 44,300.

At the same time, the number of people registered as unemployed by labour offices increased by 158,900 in January, to nearly 2.3 million (up by 174,200 over a year earlier). As a result, the reigstered unemployment rate amounted to 14.2%, i.e. 0.8 p.p. higher than in December and 1 p.p. higher than in the corresponding month of 2012. Meanwhile, the unemployment rate measured according to the Labour Force Survey (LFS) increased to 10.1% in the fourt quarter of 2012, 0.2 p.p. higher than in Q3 and 0.4 p.p. higher than in the same period a year ago.

We expect labour market figures for February to show a further deterioration of conditions. And while the spring is likely to see a seasonal boost in labour demand, translating into better employment figures, and though the economy should enter a gradual recuperation stage in the second half of 2013, the anticipated recovery is unlikely to provide any significant fillip to the job market until it gathers more momentum. Therefore we forecast that at the end of 2013 the registered unemployment rate will stand at 13.9%.

Unemployment rate in Poland (%), January 2011-January 2013

Slowdown of wage growth

Weak labour demand and deteriorating financial performance of companies are combining to stifle wage growth. In January the average gross monthly wage in the enterprise sector amounted to PLN 3,680 (approx. €890), up by a tiny 0.4% compared with a year earlier. Although the meagre rate of wage growth was in large part attributable to statistical factors, namely a very high base of comparison (in January 2012 wage growth quickened sharply to 8.1% y-o-y), the figure was below market expectations, which were for an increase of 0.9% y-o-y. This means that in real terms, wages declined by 1.3% y-o-y.

In 2012 the average gross monthly wage in the enterprise sector grew by 3.4% 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), January 2012-January 2013

Modest rise in retail sales

Having contracted in December 2012, retail sales recovered in the first month of 2013, with a 3.1% y-o-y increase at current prices[2]. The result, which came despite a significant real-terms decline in the wage bill[3], surpassed market expectations, which were for a small increase of 0.1% y-o-y.

In comparison with the corresponding period of 2012, sales were up in five of the main branch specialisations and down in three. The highest increase in sales was noted in the category of other retail sale in non-specialised stores (up by 16.5% y-o-y), followed by sales of pharmaceuticals, cosmetics and orthopaedic equipment (up by 13.% y-o-y) and motor vehicles, motorcycles and parts (up by 11.9% y-o-y). Sales of textiles, clothing and footwear went up by 6.6% y-o-y and sales of fuels edged up by 0.9% y-o-y. By contrast, sales of newspapers, books and other sale in specialised stores decreased by 3.3% y-o-y, furniture, radio, TV and household appliances by 1.5% y-o-y, and food, beverages and tobacco products by 0.4% y-o-y.

In 2012 retail sales rose by 5.6% at current prices, and by 2.3% in real terms. Whilst consumer sentiment improved somewhat at the begininng of 2013, we expect consumer spending to remain subdued in the months ahead, due to a mixture of a high comparative base, tough labour market conditions, and sluggish wage growth. And while a modest recovery in retail sales is possibile in the second half of the year, we forecast that in 2013 as a whole the rate of retail sales growth will be lower than it was in 2012.

Retail sales in Poland (%, y-o-y), January 2012-January 2013

Substantial easing of inflation

Meanwhile, inflationary pressures have been subsiding for several months now. In January the consumer price index (CPI) eased to 1.7% y-o-y, a sharp deceleration compared with the previous month that came in spite of a lower base of comparison. The figure is below market expectations, which averaged 2% y-o-y.

The highest price increase in the 12 months to January was noted in food and non-alcoholic beverages (up by 3.5% y-o-y) and in alcoholic beverages and tobacco products (up by 3.2% y-o-y). Prices of housing and energy went up by 2.6% y-o-y. By contrast, prices in the category of transport (which includes car fuel) decreased by 0.7% y-o-y, while clothing and footwear prices declined by 4.9% y-o-y. On a month-on-month basis the CPI was 0.1% in January.

In 2012 consumer prices rose by 3.7%. In our view, several factors have been at play in the sharp slowing of inflation in January, namely weak consumption, a relatively strong zloty, lower fuel prices, and a reduction in official gas tariffs as of the new year. We expect inflation to continue to decelerate in the coming months. We forecast that in 2013 the average annualised CPI will be below 2%.

Consumer price index in Poland (%, y-o-y), January 2012-January 2013

Lower producer prices

Producer inflation has fallen even more sharply. In January the producer price index (PPI) was -1.2% y-o-y, a deepening of the decline in prices recorded in December.

Of Poland’s main industrial sectors, two saw declines in prices in January, namely mining-quarrying (down by 8.9% y-o-y) and manufacturing (down by 1.1% y-o-y). By contrast, prices in electricity, gas, steam and air conditioning supply rose 2.5% y-o-y and in water supply, sewerage, waste management and remediation activities by 2.1% y-o-y. On a month-on-month basis the PPI was 0.1%.

In 2012 producer prices grew by 3.3% y-o-y. We expect the PPI to remain at a low level also in the months ahead, due to weak economic activity and the consequent absence of demand pressure, as well as a high comparative base. We forecast that in 2013 average annualised PPI inflation will only slightly exceed 1%.

Producer price index in Poland (%, y-o-y), January 2012-January 2013

Paweł Sionko

Senior Economist, PMR

pawel.sionko@pmrpublications.com

[1] In February the PMI index for Poland’s manufacturing sector improved from 48.6 points to 48.9 points. However, it was another consecutive month that the index remained below the 50-point barrier separating expansion from contraction.

[2] At constant prices, retail sales grew by 2.4% y-o-y in January.

[3] In January the wage bill in the enterprise sector contracted by 2.1% y-o-y in real terms.



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