A good ending to the year

 

 

Thanks to a rise in economic activity in the final months of the year and to a low reference base, in the fourth quarter of 2009 the Polish economy expanded by about 3%. According to preliminary estimates from the Central Statistical Office (GUS), in 2009 as a whole Poland’s GDP grew by 1.7%, slightly exceeding market expectations, which averaged 1.6%. Private consumption rose by 2.3% last year, while gross fixed capital formation fell by 0.3%. With domestic demand down by 0.9%, the relatively strong rate of economic growth was a result of a positive contribution from net exports.

Latest macroeconomic data support expectations that economic conditions will continue to improve this year. According to our forecasts, in 2010 Poland's GDP will rise by 2.3%.

 

 

One source of optimism are latest foreign trade figures, which indicate that the sharp rise in industrial output observed in November was not merely a result of a low reference base, but reflected a strengthening of foreign demand. Just as at the low point of the downturn Polish exports declined at a lower rate than imports, their recovery over the past few months has been faster than that of imports. According to preliminary data from the National Bank of Poland (NBP), in November 2009 the value of exports (in euro terms) was only 0.1% lower than a year earlier, whereas imports were down by nearly 12% (in zloty terms exports jumped by as much as 12% y-o-y, with imports down by 1.2% y-o-y).

Cumulative data for the January-November period show a similar trend. According to GUS, in the first 11 months of 2009 the total value of Polish exports of goods amounted to €88.7bn, while imports equalled €96.2bn. This translates into a nominal decline of 18.8% y-o-y and 27.5% y-o-y, respectively. As a result, the country’s foreign trade deficit narrowed by more than two thirds compared with a year earlier[1], to €7.5bn.

Poland’s trade balance with developed countries improved over the analysed period and showed a surplus, as did the balance of trade with the European Union. 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 trading partners, exports to Italy held up relatively the best, falling by 7.4% y-o-y, the only instance of a single-digit drop among the main export markets. Exports to Great Britain and France fell by a little over 10% y-o-y. By contrast, exports to Russia plummeted by 42.1% y-o-y. Imports from South Korea again showed the greatest resilience, dropping by 9% y-o-y. On the other hand, imports from Russia plunged by 36.3% y-o-y, and from Germany and France by nearly 30% y-o-y.

Although the zloty has strengthened against the euro and the dollar in recent months, a reflection of the gradual stabilisation in the world economy and of Poland’s strong macroeconomic performance compared with other countries, the scale of the appreciation was not big enough to have a tangible impact on exports. We believe that, given the current exchange rate of the zloty, the outlook for exports depends primarily on economic conditions among Poland’s major trade partners (which are better than they were a few months ago) and on the associated strength of foreign demand. Taking into account the very low reference base, we forecast that in 2010 Polish exports will rise by 8.5% and imports by 10.8%.

 

 

Industrial output figures for December were likewise robust, with growth of 7.4% y-o-y. Although this represents a slight deceleration of output growth compared with the previous month, the apparent slowdown is a statistical effect resulting from a lower reference base (in seasonally-adjusted terms, industrial output rose at a faster rate than in November). Nevertheless, the market had expected significantly higher growth, in the region of 11.5% y-o-y.

Compared with the corresponding period of 2008, output was up in 24 out of 34 industrial sectors. Of the main sectors, the highest growth (by 10.9% y-o-y) was noted in water supply, sewage treatment, waste disposal and land rehabilitation, followed by manufacturing (up by 8.2% y-o-y). Modest increases (by 2.2% y-o-y and 1.5% y-o-y, respectively) occurred in electricity, gas, steam and air conditioning supply and in mining-quarrying.

In the case of the country’s manufacturing sub-sectors, particularly impressive output increases were noted e.g. in chemicals and chemical products (up by 27.9% y-o-y), motor vehicles (up by 26% y-o-y) or paper and paper products (up by 21.7% y-o-y). Strong double-digit growth also occurred e.g. in rubber and plastic products (18.1% y-o-y) or computers, electronic and optical products (up by 17.5% y-o-y). By contrast, output of other transport equipment was down by over 47% y-o-y and of pharmaceuticals 11.8% y-o-y.

In 2009 industrial output declined by 3.2%. We expect the high rate of industrial output growth observed towards the end of last year to continue in the next few months, helped by improving global economic conditions, but above all by a very low reference base. But later, as the reference base rises, the pace of output growth is set to slow down. According to our forecasts, in 2010 as a whole industrial output will rise by 3.7%.

 

 

A much more pronounced slowdown in activity occurred in the construction sector, with construction-assembly output up by just 3.1% y-o-y in December, compared with growth of nearly 10% y-o-y in November. However, the weaker result was due in large part to the advent of severe winter weather. Output in civil engineering grew substantially for another consecutive month in December (up by 16.4% y-o-y), whereas drops occurred in construction of buildings and in specialised construction activities, by 5.4% y-o-y and 4.1% y-o-y, respectively.

In 2009 as a whole construction-assembly output grew by 3.7%. Taking into account a relatively low reference base in the first half of the year and ongoing preparations for the EURO 2012 football championships, we forecast that in 2010 the rate of output growth in the construction sector will accelerate to 8%. One source of risk for this scenario is the tight fiscal situation, which could make authorities unable to co-finance EU-sponsored projects. Another is the possibility of a second wave of the crisis. In the early part of the year much will also depend on weather conditions. It is clear that the strong subzero temperatures  observed in January (weather conditions were much milder last year) will translate into weaker construction-assembly output results for the month.

 

The severe winter weather also had an impact on the labour market, contributing to a sharp rise in registered jobless numbers (by about 81,600 in relation to one month earlier and by nearly 419,000 compared with December 2008). As a result, the registered unemployment rate stood at 11.9% at the end of 2009, i.e. 0.5 p.p. higher than in November and 2.4 p.p. higher than in the same period a year earlier.

At the same time, average monthly employment in the enterprise sector amounted to just over 5.25m people, and was 0.2% lower in relation to the previous month. During the analysed period, there were approximately 10,300 fewer people in employment compared with November. In the 12 months up to December, average employment in the enterprise sector has shrunk by about 98,000.

We expect the unemployment rate to continue rising in the coming months. Although the jobless numbers are likely to fall in the spring as demand for seasonal work re-emerges, a durable improvement will not occur until the economy accelerates more decisively. Therefore we forecast that by the end of 2010 the registered unemployment rate will climb to 12.5%.

 

 

Despite weak labour demand, wage growth accelerated significantly in December. The average gross monthly wage in the enterprise sector amounted to just over 3,652 (approx. €882) and was 6.5% y-o-y higher than in the corresponding period of the previous year[2]. The result significantly exceeded market expectations, which averaged 3.5% y-o-y.

In 2009 the average gross monthly wage in the enterprise sector increased by 4.4% y-o-y. In our view, the sharp acceleration of wage growth observed in December is not a lasting phenomenon. We believe that it was in large part due to the pay-out of seasonal bonuses (last year many companies decided to scrap them in response to the crisis) and to the decision by some companies to pay December 2008 wages in January 2009, which had to do with the reduction in personal income tax taking effect as of 2009. We forecast that in 2010 wages in Poland will rise by about 4-5%.

 

 

The improvement in macroeconomic conditions observed in the final months of 2009 fed through into consumer sentiment, which brightened somewhat in the fourth quarter and led to a rise in consumers’ willingness to spend (however, readiness to make purchases of durable goods remained very limited). This was reflected in retail sales, whose growth (at current prices) accelerated to 7.2% y-o-y in December. The result was above market expectations, which were around 6% y-o-y.

In comparison with the corresponding period of 2008, sales were up in six of the main branch specialisations. The highest increase (up by 16.8% y-o-y) was noted in sales of textiles, clothing and footwear, followed by pharmaceuticals, cosmetics and orthopaedic equipment (up by 15.7% y-o-y). Double-digit increases were also observed in fuels (12.7% y-o-y) and other sales at non-specialist retail stores (12% y-o-y). Sales of food, beverages and tobacco products rose by 7% y-o-y and of motor vehicles, motorcycles and parts by 3.9% y-o-y. On the other hand, sales of furniture, radio, TV and household appliances fell by 6.8% y-o-y, and newspapers, books and other sales at specialist stores slipped by 0.3% y-o-y.

In 2009 retail sales at current prices climbed by 4.3% y-o-y. With gradually improving economic conditions and with a low reference base, we expect the solid rate of retail sales growth to be maintained in the months ahead. Nevertheless, we forecast that in 2010 as a whole retail sales growth will not exceed 5%. That is because sales will be held back by persisting weakness in the labour market and by the expiry of the German government’s car scrappage incentive scheme, which was a major factor supporting retail sales in Poland in 2009.

 

 

Inflation quickened for another consecutive month in December, with the consumer price index (CPI) rising to 3.5% y-o-y, thereby reaching the top end of the central bank’s inflationary target range (2.5% y-o-y +/- 1 p.p.). However, the acceleration was mainly a statistical effect resulting from a low reference base.

The highest price increase in the 12 months up to December was noted in car fuels (12.3% y-o-y), followed by alcoholic beverages and tobacco products (up 8% y-o-y) and housing and energy (up 5.7% y-o-y). An above-average increase was also noted in hotels and restaurants (up 4.1% y-o-y). On the other hand, clothing and footwear prices fell by 6.1% y-o-y while communication charges were down 1.6% y-o-y. In monthly terms consumer prices showed zero growth.

In 2009 average annualised CPI amounted to 3.5%. We expect a significant slowing of the rate of consumer price growth in the months ahead, with a full-year forecast of 2.3%.

 

 

There was also a slight acceleration in the producer price index (PPI), which amounted to 2.1% y-o-y in December. As with the CPI, the result was broadly in line with market expectations.

Of Poland’s main industrial sectors, the steepest price increase (22.8% y-o-y) was noted in mining-quarrying. Double-digit growth also occurred in electricity, gas, steam and air conditioning supply (up by 10.8% y-o-y), while in water supply, sewerage, waste management and remediation activities the PPI amounted to 7.3% y-o-y. By contrast, in the manufacturing sector producer prices fell by 0.6% y-o-y. In comparison with November producer prices slipped 0.2%.

In 2009 average annualised PPI amounted to 3.4%. Because of a very high reference base, we expect a marked slowing of producer price growth in the coming months. We forecast that in 2010 the PPI will come in at around 1.5%.

 

 

After examining latest macroeconomic data, the Monetary Policy Council (RPP) decided to leave interest rates unchanged at its January 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 United States and (to a less extent) in the eurozone, as well as accelerating economic growth in the major emerging markets (especially China). However, the job situation in developed countries remained difficult and access to credit tight, it said. Meanwhile, domestic economic figures likewise signal an improvement in economic activity in Poland, and although the unemployment rate is creeping up, the relative stabilisation of employment in the enterprise sector seems to suggest that the negative trends on the labour market are bottoming out, the Council reckons. But lending to business continues to contract while lending to consumers remained subdued.

In December inflation accelerated slightly, due mainly to statistical factors. However, in the months ahead consumer price growth will slow, pulled down by a high reference base, weak demand, and the effects of the earlier appreciation of the zloty and moderate rate of increase in labour costs.

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. A major source of uncertainty are the effects of (the unwinding of) the stimulus measures implemented by foreign governments to protect economic growth.

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, one should not expect a change in interest rates in the months ahead. A tightening cycle could start only in the second half of the year, when the positive trends in the economy become more entrenched and inflationary pressures re-emerge. We forecast that at the end of 2010 the main reference rate will stand at 3.75%.

 

 

Paweł Sionko

Senior Economist, PMR Publications