What can we expect in 2010?

 

 

Although the 2009 economic slowdown was very severe in its effects, the Polish economy weathered the related shocks significantly better than other European economies. Whereas sentiment was plummeting in the first half of the year, as reflected in the forecasts formulated by analysts, some of whom indicated a possible recession in Poland, the bleakest scenarios were not fulfilled. The macroeconomic indicators started to improve relatively quickly, and starting from the second half of the year, they were heralding the imminent recovery. The most surprising development in terms of changes in macroeconomic parameters was probably the degree of the zloty’s depreciation in early 2009, which was caused mainly by the undermined confidence of international investors in the Central and Eastern European region. As the time passed, it was obvious that the Polish economy would not be as badly affected by the crisis as the Baltic states or Ukraine, and, accordingly, the strengthening of the zloty was the effect.

The Polish economy welcomes new year at full speed. By all means it is clear that GDP growth will be around 3% year-on-year, both in Q4 2009 and Q1 2010. However, how the situation will evolve in the coming quarters or in the second half of the year still remains a baffling mystery. Whether the Polish economy will continue to develop at a high rate will depend on the situation abroad. Whilst the developments in the internal market are fuelling optimism, the second wave of the global slowdown can be feared. Therefore, the threat to the current forecasts concerning GDP growth in Poland in 2010, which are relatively optimistic, appears to be an asymmetrically downward risk.

 

In general, the situation in the labour market in 2009 was to a high degree consistent with our forecast formulated a year ago – the unemployment rate rose to around 12%, employment fell by more than 1.5% and the rate of growth in salaries slowed. Salaries slowed more than we predicted, which resulted in a significant deceleration in consumption. At the same time, what we should be glad about is that both the labour market deterioration and consumption trends were not as adverse as forecasts issued during the year suggested. Given the most recent signals in the economy, we expect that the consumption will continue to grow at around 2% in 2010, while the labour situation will gradually improve and the second half of the year can see higher employment. However, as a result of cost discipline measures taken by companies, salaries will not grow rapidly in 2010 (though the situation in H2 will improve relative to the first six months of the year).

 

As far as investments are concerned, we expect that they will limp back to the positive growth path during 2010, largely driven by the implementation of projects co-financed by the EU funds. To a large extent, this factor will neutralise a still negative trend in investments in the private sector. Concurrently, as the global situation improves, foreign direct investments should accelerate, though they will not revert to the level reported in 2006-2008.

 

Exports performance will mainly depend on the economic situation of Poland’s main trade partners. We assume that in 2010, GDP will rise up by around 1% in the eurozone, which will be contributing to greater exports. The demand for Polish products abroad will be also driven by a competitive zloty exchange rate as moderate strengthening of the zloty is expected. However, the impact of net exports on Poland’s GDP will be probably negative (approx. -1 p.p.) due to the significant import intensity of production activities in connection with new investments and the process of inventory replenishment (an approx. 1.5 p.p. contribution of increased fixed current assets to GDP). Higher imports relative to exports will be a factor contributing to a higher trade deficit and a higher current account deficit (which will grow to approx. 3% of GDP), but the structure of external imbalance financing will improve. As a result, the rising balance in the current account should not be a source of concern to foreign investors.

 

Contrary to our predictions, in 2009 the situation in the construction industry improved significantly despite a crisis in the housing market. A wider scale of infrastructure projects in progress, which are co-financed with the EU funds, was not only a factor stabilising activity in the construction sector, as we had anticipated, but it also contributed to a marked increase in output growth and higher employment in the sector. We assume that construction and assembly output will continue to slightly accelerate in 2010.

We anticipate that an even more positive change will affect industrial output. After a year of falls, in 2010 we are to see an increase of a couple of percent due to improving exports and inventory replenishment. In all probability, stock replenishment began in late 2009 and was responsible, inter alia, for rapid growth in industrial output in November-December. In early 2010, output will continue to grow strongly, but it will wear off along with the dissipation of the low-base effect. Therefore, we do not expect that industrial output will further grow at a double-digit level later during the year.

The value added in market services and retail sales is also to experience an increased rate of growth. However, the growth will be limited by the continuing hard conditions in the labour market. In 2009, growth in retail sales was reported mainly for essential goods, while demand for durable goods (home electronics and white goods) was limited. The only exception was the sale of cars where some sort of recovery was seen during the year, but it could well be attributable to demand from foreign markets. A similar retail sale structure is expected in 2010, though it should be borne in mind that some of the demand for cars was borrowed from the future.

 

Our forecast for the y-o-y inflation rate in 2009 was too optimistic, which, to a large extent, was due to the shock related to the depreciation of the zloty. The weaker zloty also had an impact on the prices of food and fuels, which were slightly higher than anticipated. We expect that the factors responsible for higher inflation in 2009 will have an opposite effect in 2010. Firstly, we forecast gradual strengthening of the zloty (we believe though that even if the zloty exchange rate stayed at the current level, it would have a disinflation effect). Secondly, increases in indirect taxes in 2010 will not be that significant. Thirdly, we expect smaller rises in the prices of electricity, heat and gas.

Additionally, we assume that food prices will rise at a slower rate than in 2009 (by approx. 3%), which will be partly caused by abundant crops of grains in Poland and relatively high crops globally, quite a high volume of global grain inventories and the anticipated appreciation of the zloty. Furthermore, in our forecast for inflation we assume that the average price of oil per barrel in 2010 will be similar to the price at the end of 2009 (several dollars above the average 2009 price).

In total, with the economic growth below the potential level and a relatively low increase in private consumption, we expect that the average consumer price index (CPI) will fall below the 2.5% inflation target set by Poland’s central bank. We anticipate the lowest inflation (less than 2% y-o-y) in the summer, though it will be conditional on falls in food prices. Core inflation (CPI less food and energy prices) is forecast at the average rate of up to 2%.

 

The year 2009 was marked by continued interest rate cuts worldwide, with many countries, including Poland, seeing them drop to all-time lows. There are many signals that the current year will bring about a reversal of this trend. While inflation prospects for 2010 are relatively favourable, the Monetary Policy Council (RPP) will definitely take into account how the situation can evolve in a mid-term horizon. Thus, continued economic recovery and the risk of inflationary pressures can likely lead to the start of interest rate hikes. This scenario will be supported by the stabilisation of interest rates abroad, which is bound to be preceded by the resignation from the quantitative easing of monetary policy. Interest rates will start to rise in the eurozone and the US only at the end of 2010, but they will likely continue to grow in 2011. An important question that needs to be answered is whether the RPP will decide to take action earlier than the European Central Bank.

It will be hard to predict interest rate change dates in Poland because the members of the Monetary Policy Council will be substituted at a (very) late date. To begin with, candidates to the Council still have not been officially named; secondly, we do not know their views on monetary policy and, consequently, the potential division of power within the new Council. It appears that the RPP will be as divided as it is today. However, besides personal preferences of the members, the decisions made by the Council will be affected by the information from the economy and analyses and forecasts prepared by the National Bank of Poland. In February, the nine new members of the Council (headed by Slawomir Skrzypek, President of the National Bank of Poland) will be able to familiarise themselves with a new inflation projection. In the previous projection, inflation was expected to rise above the target set by the central bank at the end of 2011. However, it does not seem probable that the RPP would lean towards a more restrictive monetary approach at any of the first meetings of the new Council.

 

In general, the year 2010 can bring about a gradual and steady improvement across most of the aspects of the economic life. Definitely, these changes will be reflected in the behaviour of the financial markets. We expect that the global economic recovery and low interest rates effective during a larger part of the year will fuel a greater global appetite for risk. These developments will provide support for gradual strengthening of the zloty, though in our opinion, we should be prepared for significant fluctuations in the zloty exchange rate during the year as a result of volatile sentiment on global markets.

 

 

Piotr Bielski

Economist, Bank Zachodni WBK