Gradual easing of negative trends

 

 

At the beginning of the fourth quarter of 2009 the IRG SGH business cycle barometer stood at -15 points and was approximately six points higher than at the onset of Q3. This marked the third consecutive quarter-on-quarter improvement of the index. The result is doubly significant in that the fourth quarter typically brings a drop in the barometer relative to Q3, as the economy steps down a gear. The improvement means that the negative impact of cyclical factors is easing off, and that the downward trend may have ended.

Signs of recovery have been in evidence already since the second quarter of the year. The IRG SGH index has shown steady quarterly improvement over this period, accompanied by a slowdown of the rate of annual declines. As a result, in the fourth quarter the barometer was just two points below its level a year earlier.

The annual fall of the barometer observed at the beginning of Q4 was chiefly due to sharply worse conditions in the construction and banking sectors and weaker household sentiment compared with a year ago. In the construction sector the business indicator has lost almost 18 points over the past year. The household indicator dropped by 10 points compared with Q4 2008, while in banking it was down by nine points. By contrast, improved conditions were noted in transportation, manufacturing and agriculture. In transportation the indicator jumped by more than 14 points, while in manufacturing and agriculture it rose by about two points. The annual change in the trade sector was insignificant.

As for the notable quarterly rise of the barometer, it was driven mainly by better conditions in manufacturing, transportation and banking. In manufacturing the business indicator was up by as much as 12 points over Q3, in transportation by 11 points and in banking by seven points. At the same time, the construction and trade sectors experienced a seasonal deterioration in conditions at the onset of Q4, a normal occurrence at this time of the year. The weakening was particularly pronounced in construction, with the sector’s indicator down by 16 points. In trade the fall was much less severe, by four points. At the same time, conditions remained broadly unchanged in agriculture and so did household sentiment.

 

 

Turning more closely to individual sectors, it should be noted that improvements in manufacturing have been observed already since March. The net values of such component variables as level of production, size of order book, company financial situation or assessment of general economic situation have risen consistently over this period. At the same time, there were no accompanying increases in employment. Meanwhile, the latest survey carried out in October showed a fall in production at private companies, which tend to react more swiftly to changes in market conditions. In the months ahead we should expect a similar decline at public sector enterprises as well, as signalled by worse assessments of current and future level of production and orders. Business confidence also dipped, with entrepreneurs expecting a slight deterioration in macroeconomic conditions in the near future. Whether such a weakening indeed materialises will depend on the impact of both seasonal and cyclical factors.

A substantial improvement was noted in car transportation, where the business indicator rose by almost 11 points over the last three months. This marked the second consecutive increase after a relatively long series of deep falls. In the banking sector the index likewise increased compared with the preceding quarter, even though in annual terms it was down by nine points.

Also of significance is the stabilisation of the household barometer, albeit at a substantially lower level in comparison with 2007. The main determinant of household sentiment are worries about job loss, which abated in Q3 before rising again in Q4. As a result, the improvement in the composite household sentiment index was smaller in Q4 than would be suggested by the performance of the other component variables. Meanwhile, the deterioration in households’ outlook on savings, observed in Q3, continued in the fourth quarter. At the same time, however, readiness to buy durable goods decreased. The actual impact of household purchasing decisions on domestic demand will depend on which of these two tendencies prevails.

 

 

To sum up, the coming months are likely to bring a seasonal weakening of economic activity. Both consumer and business expectations about the near future were less optimistic at the beginning of Q4 than they were three months earlier. However, the deterioration was not significant. The observed shifts in consumer and business sentiment suggest a stabilisation of business conditions in the next few months, followed by a rebound afterwards.

The main source of risk for this positive scenario is a decline in domestic demand and a deterioration of the financial situation of enterprises, both in terms of liquidity and access to reasonable credit. Another persisting threat are negative external factors, particularly a deterioration of economic conditions in the EU.

 

 

Prof. Elzbieta Adamowicz

IRG SGH

 

Joanna Klimkowska, Ph.D.

IRG SGH