Prospect of further improvement

 

 

In the second half of 2009, the Polish economy began to regain strength, following rather weak performance at the beginning of the year. Towards the end of 2009 we saw mounting evidence of a broadening economic recovery, and industrial output and retail sales were rising almost at their year-ago levels. However, it should be noted that the improvements in economic indicators were in large part a statistical effect, helped by a lower reference base. Poland will not be able to sustain a high rate of economic growth through 2010 unless there is a durable recovery in global economic performance. If European economies do not get firmly back on their feet by the time the beneficial effects of stimulus spending wear off, EU investments and a resilient domestic market will not be enough to ensure rapid expansion of the Polish economy.

 

 

The improvement in global economic conditions has yet to feed through into foreign trade figures. According to preliminary data from the Central Statistical Office (GUS), in the first 10 months of 2009 the total value of Polish exports of goods amounted to €78.9bn, while imports equalled €86.5bn. This translates into a nominal decline of 21.4% y-o-y and 29% y-o-y, respectively. As a result, the country’s foreign trade deficit narrowed by almost two thirds compared with a year ago[1], to €7.6bn.

Poland’s trade balance with developed countries improved over the analysed period and showed a surplus, as did the balance of trade with the EU and with the eurozone. There was an improvement too in the trade balance with developing countries and with the countries of Southern and Eastern Europe, although both figures remained in negative territory. Of Poland’s main trading partners, exports to Italy held up relatively the best, falling by a comparatively moderate 11.6% y-o-y. Exports to Great Britain were down by 13.1% y-o-y. By contrast, exports to Ukraine plummeted by 47.9% y-o-y and to Russia by 43.8% y-o-y. Imports from South Korea showed the greatest resilience, dropping by 8.9% y-o-y, the only instance of a single-digit decline among main import countries of origin. On the other hand, imports from Russia plunged by 37.3% y-o-y, from France by 32.2% y-o-y and from Germany by 31.3% y-o-y.

Of the main product categories, only beverages and tobacco saw an annualised increase (by 28%) in euro-denominated exports (at current prices) in January-October 2009. All the remaining segments suffered declines, led by mineral fuels, lubricants and related materials (down by 44.6% y-o-y) and crude materials, inedible, except fuels (down by 36.2% y-o-y). A comparatively modest fall (by 8.4% y-o-y) was noted in exports of food and live animals. At the same time, imports were lower in all product categories. As with exports, the steepest decline (by 41.5% y-o-y) was noted in mineral fuels, lubricants and related materials, whereas beverages and tobacco achieved relatively the best result (a drop of 7.8% y-o-y).

Although it is our view that the recovery in foreign demand will proceed only at a moderate pace, we expect a marked improvement in foreign trade figures in the coming months, due to a very low reference base. We believe that November data will already show a significant easing of the downward trend, and in 2010 we should see a resumption of growth in foreign trade. We expect this improvement to be more pronounced in the case of imports than exports, as companies move to rebuild their inventories. In view of this, we estimate that in 2009 exports declined by 17.2%, while imports dropped by 22.3%. At the same time, for 2010 we forecast growth of 8.5% and 10.8%, respectively.

 

 

One sign of reviving demand and improving prospects for exports is the sharp recovery in industrial output, which in November jumped by 9.8% y-o-y, reversing negative numbers that lasted for more than a year. It was the highest increase since April 2008, when the Polish economy was at the height of expansion. Particularly noteworthy were strong increases in many of the so-called export sectors.

Compared with the corresponding period of 2008, output was up in 26 out of 34 industrial sectors. Of the main sectors, the highest increase (by 11.3% y-o-y) was registered in manufacturing. A very strong rise in output was also noted in water supply, sewage treatment, waste disposal and land rehabilitation (up by 9.3% y-o-y), while a modest one (by 2.5% y-o-y) occurred in electricity, gas, steam and air conditioning supply. By contrast, in mining-quarrying output was down by 3.3% y-o-y. In the case of the country’s manufacturing sub-sectors, impressive increases were noted in chemicals and chemical products (up by 38.3% y-o-y), motor vehicles (up by 19.8% y-o-y), pharmaceutical products (up by 18.8% y-o-y), paper and paper products (up by 18.4% y-o-y), or computers, electronic and optical products (up by 18.2% y-o-y). Double-digit growth was also registered e.g. in basic metals, rubber and plastic products, electrical equipment, or beverages. By contrast, output in machinery and equipment was down by 1.8% y-o-y, in wearing apparel by 1.6% y-o-y, and in tobacco products by 0.2% y-o-y.

Although the steep acceleration of industrial output in November was to some extent a statistical effect (helped by a very low reference base and a higher number of working days compared with a year earlier), seasonally-adjusted figures also showed a strong increase in output (by 6.8% y-o-y). We expect this robust rate of industrial output growth to be maintained in the months ahead, supported by gradually improving economic conditions abroad and by base effects. Thereafter, however, as the reference base rises, production will slow to moderate growth. Therefore, we estimate that in 2009 industrial output contracted by

3.1%[2], and forecast 3.7% growth in 2010.

 

 

November also witnessed very strong growth in construction-assembly output (by 9.9% y-o-y). The result was driven mainly by civil engineering, which expanded by an impressive 23.5% y-o-y, chiefly on the back of EU-funded infrastructure projects. At the same time, output in construction of buildings grew by a solid 5.3% y-o-y, whereas specialised construction activities were down by 3.8% y-o-y.

In January-November construction-assembly output was 4% higher y-o-y. We estimate that in 2009 as a whole growth reached 5%. In view of a relatively low reference base in the first half of the year and preparations for the EURO 2012, we forecast that in 2010 construction-assembly output growth will accelerate to 8%. Potential risk factors for this scenario are growing fiscal pressures that could limit the ability of the government to co-finance EU projects, as well as the spectre of a second dip of global recession, as the effects of stimulus packages wear off.

 

One consequence of the Polish economy’s considerable resistance to the crisis is a relatively good situation on the labour market. Following major adjustments implemented in the first half of 2009 (especially in the manufacturing sector), companies were much less willing to cut jobs in the latter part of the year.

In November, average monthly employment in the enterprise sector amounted to just under 5.27m people, and was slightly lower in relation to the previous month. During the analysed period, there were approximately 2,200 fewer people in employment compared with October. In the 12 months up to November average employment in the enterprise sector shrank by 2.2% y-o-y, i.e. by nearly 121,000.

As a result, the registered unemployment rate stood at 11.4% at the end of November. This was up by 0.3 p.p. compared with October and 2.3 points higher than in the corresponding month of the previous year. While this means that the country’s jobless rolls increased by about 413,000 over the 12 preceding months, the rise in unemployment proved less pronounced than anticipated.

Despite signs of improving economic conditions, we expect the jobless rate to continue rising in the months ahead. We estimate that at the end of 2009 the registered unemployment rate reached 11.9% and that it would keep rising until the spring, when demand for seasonal work returns. However, a durable improvement can only be expected when the economy accelerates more visibly (experience shows that the Polish economy needs to expand by about 3.5-4% y-o-y to generate new jobs). That is why we forecast that by the end of 2010 the registered unemployment rate will creep up to 12.5%.

 

 

The weakness of labour demand and the still difficult financial situation of enterprises are reflected in wage growth, which has been very sluggish for several months. In November the average gross monthly wage in the enterprise sector amounted to just under PLN 3,404 (approx. €816) and was 2.3% y-o-y higher than in the corresponding period of the previous year. This means that in real terms wages fell by 1% y-o-y.

In the first 11 months of 2009 the average gross monthly wage in the enterprise sector increased by 4.5% y-o-y. In our view, no major acceleration in wage growth should be expected in the coming months. We forecast that in 2010 wages in the enterprise sector will rise by about 3-4%.

 

 

Although the wage bill in the enterprise sector continued its 8-month real-terms decline in November, retail sales at current prices rose by 6.3% y-o-y, the highest increase since December 2008. It should be noted, however, that the result was partly a statistical effect, helped by a lower reference base.

In comparison with the corresponding period of 2008, sales were up in all of the main branch specialisations except one. The highest increase (up by 18.6% y-o-y) was noted in sales of pharmaceuticals, cosmetics and orthopaedic equipment, followed by food, beverages and tobacco products (up by 11.8% y-o-y) and other sales at non-specialised retail stores (up by 11.6% y-o-y). The strong November result was also thanks to a robust increase in sales of motor vehicles, motorcycles and parts (by 8.2% y-o-y). The one sector which experienced a decline was furniture, radio, TV and household appliances, where sales were down by 6.7% y-o-y in November.

In the first 11 months of 2009, retail sales at current prices climbed by 3.9% y-o-y. Because of a high reference base, we estimate that retail sales growth slowed slightly in December, and that therefore in 2009 as a whole growth amounted to 3.4%. We forecast that in 2010 retail sales at current prices will rise by 4.1%, dragged down by the continuing difficult situation on the labour market.

 

 

The improvement in economic activity observed in recent months has been accompanied by a stabilisation of inflation. Although the consumer price index (CPI) accelerated slightly in November, to 3.3% y-o-y, this was a statistical effect related to a lower reference base. Significantly, the CPI stayed below the upper end of the central bank’s inflationary target range (2.5% y-o-y +/- 1 p.p.) for the third consecutive month.

The highest price increase in the 12 months up to November was noted in alcoholic beverages and tobacco products (up 8.3% y-o-y), followed by housing and energy (up 5.8% y-o-y). Above-average increases were also noted in hotels and restaurants (up 4.4% y-o-y), fuels (up 3.7% y-o-y) and food and non-alcoholic beverages (up 3.4% y-o-y). On the other hand, clothing and footwear prices fell by 6.2% y-o-y, while communication charges were down by 0.7% y-o-y. On a month-on-month basis, the CPI was 0.3% y-o-y.

In January-November consumer prices rose by 3.5% y-o-y. Although recent months brought clear signs of dampening inflationary pressures, we estimate that the CPI accelerated slightly towards the end of last 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 onwards. We estimate that in 2009 average annual inflation amounted to 3.5%, and forecast that it will drop to 2.3% in 2010.

 

 

Meanwhile, the producer price index (PPI) amounted to 2% y-o-y in November, maintaining its level from the previous month. Of Poland’s main industrial sectors, the steepest price growth (19.8% y-o-y) was noted in mining-quarrying. Prices also rose rapidly in electricity, gas, steam and air conditioning supply (up by 10.9% y-o-y). In water supply, sewerage, waste management and remediation activities the PPI amounted to 7.6% y-o-y in November, whereas in the manufacturing sector prices fell by 0.6% y-o-y. On a month-on-month basis, producer prices dropped by 0.3%.

In January-November producer prices rose by 3.5% y-o-y. We estimate that in 2009 as a whole the average annualised PPI came in at 3.4%, and forecast that producer price growth will slow to 1.5% in 2010.

 

 

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

In its commentary on the session, the Council noted that latest data provided further evidence of reviving economic activity in the eurozone and especially in the United States (as well as in major emerging economies), although the situation on the labour market remained difficult and access to credit tight. Meanwhile, latest domestic economic figures, notably data on industrial output and construction-assembly output as well as leading indicators, likewise signalled an improvement in economic activity in Poland, it said. Despite the rising jobless rate, the stabilisation of employment in the enterprise sector seems to suggest that the negative trends on the domestic labour market are bottoming out. However, lending to business continued to contract while lending to consumers remained subdued, the RPP noted.

In November inflation accelerated slightly, due mainly to higher food and electricity prices. In the opinion of the Council, consumer prices may rise further in the short term due to a low reference base, but are set to resume their downward trend thereafter, helped by base effects, 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