Further signs of recovery

 

According to preliminary estimates of the Central Statistical Office (GUS), in the third quarter of the year Poland’s gross domestic product exceeded PLN 331bn (approx. €79bn), which in real terms translates into growth of 1.7% y-o-y[1]. Economic growth thus quickened compared with the previous quarter and came ahead of market expectations, which averaged 1.5% y-o-y.

The relatively high pace of economic growth in Q3 was primarily the consequence of a strong (+3 p.p.) contribution from net exports. As in the preceding quarter, this was due, not so much to the strength of foreign demand as to a collapse of domestic demand for foreign goods and services (according to national accounts, in the third quarter exports contracted by 9.5% y-o-y, while imports by 14.9% y-o-y).

At the same time, the contribution of domestic demand to GDP growth was negative (-1.3 p.p.), although less so than in Q2, thanks to more rapid growth of private consumption (by 2.2% y-o-y), which remains one of the main engines of economic growth; and to a less deep decline in gross fixed capital formation (by 1.5% y-o-y), helped by large public investments financed from EU funds[2]. At the same time, inventories fell sharply for another straight quarter.

Although economic conditions in Poland have improved over the past few months, it should be remembered that the pick-up of GDP growth observed in Q3 was to some extent due to statistical and seasonal factors. Seasonally-adjusted GDP rose by a less impressive 1% y-o-y over the July-September period, a rate of expansion lower than in the preceding quarter.

 

 

Whether the strengthening of economic activity in Poland continues will largely depend on the global economy. Although recent months brought an improvement in global economic performance and a slight revival of foreign demand, this has yet to make a visible impact on foreign trade figures. In the first three quarters of the year the total value of Polish exports of goods amounted to €70bn, while imports equalled €76.4bn. This translates into a nominal decline of 21.6% y-o-y and 29.5% y-o-y, respectively. As a result, the country’s foreign trade deficit narrowed by almost two thirds compared with a year ago[3], to €6.4bn.

Poland’s trade balance with developed countries, including the EU as a whole as well as the eurozone, improved over the analysed period and showed a surplus of €7.2bn. There was a slight improvement too in the trade balance with developing countries, although it remained firmly in negative territory. So did the balance of trade with the countries of Southern and Eastern Europe. Of Poland’s main trading partners, exports to Italy held up relatively the best, falling by a comparatively moderate 9.1% y-o-y, the only instance of a single-digit decline among the main export markets. By contrast, exports to Ukraine plummeted by 48.8% y-o-y, and to Russia by 44.8% y-o-y. Imports from South Korea showed the greatest resilience, dropping by 5.8% y-o-y. On the other hand, imports from Russia plunged by 37.9% y-o-y, from France by 33.5% y-o-y and from Germany by 32.3% y-o-y.

Of the main product categories, only beverages and tobacco saw an annualised increase (by 29.1%) in euro-denominated exports (at current prices) in January-September. All the remaining categories suffered declines, led by mineral fuels, lubricants and related materials (down by 46.8% y-o-y) and crude materials, inedible, except fuels (down by 38.3% y-o-y). Against this background, the fall in exports of food and live animals was comparatively small (down by 7.5% y-o-y). At the same time, imports were lower in all product categories. As with exports, the biggest decline (by 43.7% y-o-y) was noted in mineral fuels, lubricants and related materials, whereas the relatively best result was achieved in beverages and tobacco (a drop of 4.2% y-o-y).

Although the recovery of foreign demand is likely to be gradual, we expect exports to return to positive territory in the coming months, due to a very low reference base. While this statistical factor will also help imports, we predict that they will remain weaker than exports, which means that the positive contribution of net exports to GDP will be maintained in the quarters ahead. The biggest threat to this scenario is an excessive appreciation of the zloty.

 

 

With improved economic conditions and a declining reference base, the rate of decline of industrial output has been slowing steadily. In October industrial output dropped by 1.2% y-o-y, a slight improvement in relation to the previous month. The result was ahead of market expectations, which averaged -2.7% y-o-y.

Compared with the corresponding period of 2008, output was down in 19 out of 34 industrial sectors. Of the main sectors, by far the steepest decline (by 11.1% y-o-y) was registered in mining-quarrying. In the manufacturing sector production was down by 1.1% y-o-y. In the other two main sectors output increased in October: in water supply, sewage treatment, waste disposal and land rehabilitation it was up by 0.6% y-o-y, and in electricity, gas, steam and air conditioning supply by 1.9% y-o-y. In the case of the country’s manufacturing sub-sectors, a double-digit contraction of output was registered in machinery and equipment (down by 17.7% y-o-y). Metal products were down by 9.8% y-o-y, and the manufacture of products from other mineral non-metallic materials by 4.3% y-o-y. Among the expanding sub-sectors, strong increases occurred e.g. in computers, electronic and optical products (up by 13.9% y-o-y), paper and paper products (up by 9.5% y-o-y) or beverages (up by 7.8% y-o-y).

In January-October industrial output slumped by 5.4% y-o-y. We expect production in the sector to accelerate significantly in the coming months, with annualised figures returning to positive territory, thanks to improving conditions, inventory replacement by manufacturers[4], and above all to a much lower reference base.

 

 

By contrast, construction-assembly output figures deteriorated in October, with growth slowing to 2.7% y-o-y following a sharp upturn in the summer. That was because solid increases in construction of buildings and in civil engineering (by 7.6% y-o-y and 6.2% y-o-y, respectively) were accompanied by a sharp contraction of output in specialised construction activities (o 13.6% y-o-y).

In January-October construction-assembly output was 4.4% higher y-o-y. We expect it to accelerate somewhat in the months ahead. For 2009 as a whole we forecast growth of about 5%.

 

The labour market is also exhibiting some positive signs, with the decline of employment observed during the past nine months apparently levelling off. In October, average monthly employment in the enterprise sector amounted to just under 5.27m people, and was marginally higher in relation to the previous month. During the analysed period, there were approximately 900 more people in employment compared with September. In the 12 months up to October average employment in the enterprise sector had shrunk by 2.4% y-o-y, i.e. by nearly 130,000.

At the same time, the registered unemployment rate rose to 11.1% at the end of October. This was up by 0.2 p.p. compared with September and 2.3 points higher than in the corresponding month of the previous year. Simultaneously, the unemployment rate measured according to the Labour Force Survey (LFS) amounted to 8.1% in Q3, i.e. up by 0.2 p.p. compared with the previous quarter and 1.5 p.p. higher than a year earlier.

In the first 10 months of 2009 average monthly employment in the enterprise sector decreased by 1.1% y-o-y. Although the October employment figures came in ahead of market expectations, we should expect labour demand to weaken in the coming months. Experience shows that the Polish economy needs to expand at about 4% y-o-y in order to generate new jobs. Furthermore, in the winter period demand for seasonal work falls, which tends to lead to an increase in official jobless rolls. However, we expect that contrary to earlier fears, the increase in unemployment will be moderate. We forecast that in 2009 as a whole employment will drop by about 1.5%, as a result of which the registered unemployment rate will near 12% at the end of December.

 

 

Although the economic situation appears to be stabilising, the rate of wage growth is slowing steadily. In October the average gross monthly wage in the enterprise sector amounted to just over PLN 3,312 (approx. €785) and was 2% higher than in the corresponding period of the previous year. This means that in real terms wages declined by 1.1% y-o-y.

In January-October the average gross monthly wage in the enterprise sector increased by 4.4% y-o-y. Because of a lower reference base, we expect a slight acceleration of wage growth in the coming months, with growth of about 4.5% projected for 2009 as a whole.

 

The difficult situation on the labour market, and in particular rising worries about job loss and a shrinking wage bill, could not but have an adverse impact on private consumption. This is reflected in retail sales, which in October showed a nominal-terms increase of just 2.1% y-o-y.

In comparison with the corresponding period of 2008, sales were up in five of the main branch specialisations. The highest increase (up by 25.1% y-o-y) was noted in sales of textiles, clothing and footwear, followed by pharmaceuticals, cosmetics and orthopaedic equipment (up by 17% y-o-y) and sales at non-specialist retail stores (up by 16.2% y-o-y). Sales of food, beverages and tobacco products were up by 9.2% y-o-y. Three sectors experienced a sales decline in October: furniture, radio, TV and household appliances (down by 9.2% y-o-y), fuels (down by 3.5% y-o-y) and motor vehicles (down by 3% y-o-y).

In the first 10 months of 2009, retail sales at current prices climbed by 3.2% y-o-y. Despite the anticipated deterioration of the labour market situation, we expect retail sales to continue growing in the single digits through the remainder of the year. The growth will be supported by a falling reference base.

 

 

The softening of consumer demand has led to a gradual fall of inflation. In October the consumer price index (CPI) amounted to 3.1% y-o-y, which represented a notable deceleration in price growth compared with November. This marked the second consecutive month that the CPI remained below the upper end of the central bank’s target range of 2.5% y-o-y +/- 1 p.p.

The highest price increase in the 12 months up to October was noted in alcoholic beverages and tobacco products (up 8.9% y-o-y), followed by housing and energy (up 6.7% y-o-y). Above-average increases were also noted in hotels and restaurants (up 4.4% y-o-y) and healthcare (up 3.3% y-o-y). On the other hand, clothing and footwear prices fell by 6.3% y-o-y, while transport prices were down by 0.7% y-o-y and communication charges by 0.3% y-o-y. On a month-on-month basis, the CPI was 0.1%.

In January-October consumer prices rose by 3.5% y-o-y. Although recent months brought clear signs of dampening inflationary pressures, we expect the CPI to accelerate slightly towards the end of the year, due to a lower reference base. Thereafter, however, the reference base will start rising again, which should lead to a marked fall in inflation from February 2010 onwards. We forecast that in 2009 average annual inflation will be around 3.5%, and will drop to 2.2% in 2010.

 

 

The producer price index (PPI) likewise remained at a moderate level in October (2% y-o-y), despite a notable acceleration. Of Poland’s main industrial sectors, the steepest price growth (16.9% y-o-y) was noted in mining-quarrying. Prices also rose rapidly in electricity, gas, steam and air conditioning supply (up by 13.8% y-o-y). In water supply, sewerage, waste management and remediation activities the PPI was a less steep 7.3% y-o-y, whereas in the manufacturing sector producer prices fell by 0.8% y-o-y. On a month-on-month basis, the PPI was 0.3% y-o-y.

In the first 10 months of the year producer prices rose by 3.6% y-o-y. We forecast that in 2009 the average annualised PPI will amount to 3.1%.

 

 

After examining latest macroeconomic data, the Monetary Policy Council (RPP) decided to leave interest rates unchanged at its November session. The decision was in line with market expectations.

In its commentary on the session, the Council noted that the global economy showed signs of recovery in the third quarter of the year, with an upturn in activity observed in the United States, the eurozone as well as in major emerging economies, although the situation on the labour market in developed countries actually deteriorated and access to credit remained difficult. Meanwhile, latest domestic economic figures, notably data on industrial output, retail sales and financial condition of enterprises, likewise signalled an improvement in economic activity in Poland in Q3. However, unemployment continued to rise and lending to businesses remained subdued, the RPP said.

In October the CPI dropped significantly, and although a temporary rebound is likely in the coming months due to a low reference base, consumer prices are set to resume their downward trend thereafter, according to the Council, helped by base effects but also by weak demand, slow wage growth and a stronger zloty.

All things considered, the Council reckons that the likelihood of inflation being above or below the central bank’s inflationary target in the medium term is comparable. At the same time, RPP believes that a combination of the anticipated global economic recovery and positive effects of earlier interest-rate cuts should help the economy return to its potential growth path.

Between November 2008 and June 2009 the Council slashed interest rates by a total of 250 basis points. As a result, the main reference rate currently stands at 3.50%, an all-time low. In our view, no changes to interest rates should be expected in the coming months.

 

 

Paweł Sionko

Economist, PMR Publications