Economy steps up a gear

According to preliminary estimates from the Central Statistical Office (GUS), in the fourth quarter of 2009 Poland’s gross domestic product rose by 3.1% y-o-y, slightly exceeding market expectations, which were for 3% y-o-y growth. This represents a sharp acceleration compared with the three preceding quarters, when the economy expanded by an average of 1.2% y-o-y. Although the higher growth rate in Q4 was in large part a statistical effect resulting from a low reference base, the level of economic activity in Poland has shown consistent improvement since mid-2009.

In the period under analysis, private consumption grew by 2% y-o-y and gross fixed capital formation by 1.6% y-o-y. As a result, for the first time in 2009 domestic demand made a positive contribution to GDP growth. However, as in Q1-Q3, the main engine of economic expansion were net exports, which contributed the remaining 2.2 percentage points (according to national accounts in Q4 2009 exports of goods and services rose by 0.6% y-o-y while imports fell by 4.9% y-o-y).

In 2009 as a whole the Polish economy expanded by 1.7%. Although at the beginning of 2010 harsh winter weather caused a drop in activity in some sectors, latest macroeconomic data and surveys of business and consumer sentiment suggest that the positive tendencies will strengthen in the months ahead. The extent and durability of the recovery will however depend in large part on the global economic situation. In our view, if the global economy avoids major turbulence, Poland could realistically achieve GDP growth of about 3% this year.

 

 

The improvement of the global economic climate, and in particular the economic recovery in the EU[1], are gradually being reflected in foreign trade statistics. Although the rate of growth of imports also improved in recent months, exports quickened at a faster pace. According to preliminary data from the National Bank of Poland (NBP), in December 2009 the euro-denominated value of exports of goods (at current prices) was 12.3% higher than a year earlier, whereas imports fell by 2.6% (in zloty terms, exports surged by as much as 15.8% y-o-y, while imports edged up by 0.4% y-o-y). Admittedly, this was partly thanks to a low reference base (the late 2008 was a period when the global crisis began to exert a strong negative impact on Polish foreign trade figures), but also reflected a strengthening of foreign demand.

While it is true that Poland’s foreign trade remained deeply depressed for much of last year, it should be noted that the fall in exports was not as pronounced as that of imports. According to the GUS, in 2009 the total value of Polish exports of goods amounted to €96.3bn, while imports equalled €105bn. This translates into a nominal decline of 17.1% and 26.3%, respectively. As a result, the country’s foreign trade deficit narrowed by two thirds compared with the previous year, to €8.7bn, i.e. about 2.8% of GDP[2].

Poland’s trade balance with developed countries, including the European Union, improved markedly over the analysed period and showed a surplus of more than €10bn. There was also an improvement in the trade balance with developing countries and with the countries of Southern and Eastern Europe, although both figures remained firmly in negative territory. Of Poland’s main trading partners, exports to Italy held up relatively the best, falling by 5%. The rate of decline in exports to Great Britain and France was also in the single digits, down by 8.4% and by 9.4%, respectively. By contrast, exports to Russia tumbled by 40.7%. Imports from South Korea showed the greatest resilience, dropping by 9.6% y-o-y, the only instance of a single-digit decline among the largest import countries of origin. On the other hand, imports from Russia plunged by 33.8%, and from France and Germany by over 28%.

Of the main product categories, only beverages and tobacco saw an annualised increase (by a hefty 30%) in euro-denominated exports. All the remaining segments suffered declines, led by mineral fuels, lubricants and related materials (down by 39.4%) and crude materials, inedible, except fuels (down by 30.2%). A comparatively small decline (by 6.4%) was noted in exports of food and live animals. At the same time, imports were lower in all product categories. As with exports, the biggest drop (by 36.5%) occurred in mineral fuels, lubricants and related materials, while the best result (a fall of a little over 9%) was achieved in beverages and tobacco and in food and live animals.

With the global economic conditions improving and with a very low reference base, we expect foreign trade to grow substantially this year. Although the zloty has appreciated significantly over the past few weeks, its current exchange rate should not impede exports. Therefore we expect that in the first half of the year sales of Polish goods to foreign markets will grow at a faster pace than imports. This pattern is likely to reverse in the latter part of the year, as domestic demand perks up. According to our forecasts, in 2010 exports will rise by 8.5% and imports by 10.8%.

 

 

The strengthening of foreign demand led to a marked acceleration of industrial output towards the end of 2009. The high growth rate continued through January, when industrial output jumped by 8.5% y-o-y. The result was well ahead of market expectations, which hovered around 5.5% y-o-y.

Compared with the corresponding period of 2009, output was up in 22 out of 34 industrial sectors. Of the main sectors, the highest growth (by 10.1% y-o-y) was noted in manufacturing, followed by water supply, sewage treatment, waste disposal and land rehabilitation (up by 6.3% y-o-y). A modest increase of 3.1% y-o-y occurred in electricity, gas, steam and air conditioning supply. By contrast, in mining-quarrying output contracted by 10.1% y-o-y.

In the case of the country’s manufacturing sub-sectors, a particularly impressive output increase was noted in computers, electronic and optical products (up by 66.7% y-o-y). Strong double-digit growth also occurred e.g. in basic metals (up by 25.8% y-o-y), motor vehicles, trailers and semi-trailers (up by 25.2% y-o-y), paper and paper products (up by 19.2% y-o-y), electrical equipment (up by 15.5% y-o-y) or chemicals and chemical products (up by 15.2% y-o-y). On the other hand, output of beverages and other transport equipment slumped by 9.5% y-o-y, that of other non-metallic mineral products was down by 8.6% y-o-y, and production of wearing apparel contracted by 7.4% y-o-y.

In 2009 industrial output declined by 3.2%. Whilst the robust growth of industrial output observed in January reflects improving economic conditions, it should be kept in mind that the result was also helped by a very low reference base (in January 2009 industrial output plummeted by as much as 15.3% y-o-y). Low base effects should ensure a continuation of solid growth in the next few months as well. Thereafter, however, as the effect disappears, a further strengthening of economic activity will be needed to support this rate of expansion. Therefore we forecast that in 2010 industrial output will rise by just under 5%.

 

 

Meanwhile, a spell of harsh winter weather meant that activity in the construction sector fared much worse in January, with construction-assembly output plunging by 15.3% y-o-y, compared to growth of 3.2% y-o-y in December. Apart from unfavourable weather conditions, the poor result was also due to a higher reference base and fewer working days (in seasonally-adjusted terms, output dropped by a much less steep 2.8% y-o-y).

The sharp slowdown occurred across all construction segments, but the deepest fall (by 22.5% y-o-y) was registered in construction of buildings, whereas in specialised construction activities output was down by 12.2% y-o-y. In civil engineering activity actually increased in annual terms, by a tiny 0.4% y-o-y.

In 2009 construction-assembly output grew by 3.7%. Although the figures for February are likely to show a continuation of the decline in output (albeit at a slower rate), due to persistent harsh weather conditions, the situation should improve considerably with the advent of the spring. Taking into consideration the relatively low reference base in the first half of the year and ongoing preparations for the EURO 2012 football championship, we forecast that in 2010 construction-assembly output will rise by about 6%.

 

Despite a steady stream of macroeconomic data suggesting that the economy is gradually picking up speed, the improvement is yet to be reflected in the labour market, where adjustments typically occur with a certain time lag.

In the fourth quarter of 2009 the unemployment rate measured according to the Labour Force Survey (LFS) amounted to 8.5%, which was 0.4 p.p. higher than in the previous quarter and up by 1.8 p.p. compared with a year earlier. During the analysed period the total number of people out of work stood at just over 1.47 million, which represented an increase of 317,000 compared with the corresponding period of the previous year. Meanwhile, the employment rate amounted to 50.4%, down by 0.5 p.p. compared with Q3 2009 and 0.6 p.p. lower than in Q4 2008. At the same time, the number of economically inactive persons rose by 0.7% during the quarter and exceeded 14.1m. As a result, the economic activity rate fell by 0.3 p.p. to 55.1% (on a year-on-year basis it was up by 0.4 p.p., though).

Simultaneously, the registered unemployment rate shot up to 12.7% in January, its highest level since August 2007. Although average monthly employment in the enterprise sector actually edged up by 0.9% over the month, slightly exceeding 5.3m people, and the annualised decline slowed to 1.4%, it is difficult to make firm conclusions as the figures are not fully comparable to 2009: the Central Statistical Office was in the process of updating the number of companies in the enterprise sector and comparisons will only be possible in March.

In our view, the sharp rise in jobless numbers observed in January was mainly the consequence of severe winter weather during this period (and the associated fall in demand for seasonal work) and the increase in the unemployment benefit that took effect on 1 January (some people delayed their registration until that time to be able to draw a higher benefit). Whilst unemployment should start falling in the spring as demand for seasonal work returns, we should not expect a durable improvement in the labour market situation until the economy gains more speed (experience shows that the Polish economy must expand by at least 3.5-4% y-o-y in order to generate a net increase in jobs)[3]. We expect that with lingering doubts about the strength and durability of the recovery, companies will delay hiring for as long as possible. Therefore we forecast that at the end of 2010 the registered unemployment rate will stand at 12.5%.

 

 

In line with our expectations, January saw a marked slowdown in wage growth. In the period under analysis, the average gross monthly wage in the enterprise sector amounted to just over PLN 3,231 (approx. €793) and was only 0.5% higher than in the corresponding period of the previous year[4]. The result was sharply below market expectations, which averaged 3.3% 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 deceleration of wage growth in January was due primarily to a high reference base (some companies delayed the payment of salaries and bonuses for December 2008 until January 2009 to benefit from a cut in the personal income tax). We forecast that in 2010 wages in Poland will rise by about 5%.

 

 

Despite several months of improving consumer confidence, in January retail sales at current prices rose by just 2.5% y-o-y[5], which represented a sharp slowdown compared with December. The result was below market expectations, which averaged 4.7% y-o-y.

In comparison with the corresponding period of 2009, sales were up in five of the main branch specialisations. The highest increase was noted in sales of fuels and of pharmaceuticals, cosmetics and orthopaedic equipment (up by 18.4% y-o-y and 18.3% y-o-y, respectively). Double-digit growth was also observed in “other sales at non-specialist retail stores” (up by 11.2% y-o-y). Sales of textiles, clothing and footwear jumped by 6.7% y-o-y, whereas newspapers, books and other sales at specialist stores were up by 3.1% y-o-y. On the other hand, sales of furniture, radio, TV and household appliances fell by 5.7% y-o-y, sales of food, beverages and tobacco products were down by 3.3% y-o-y, and of motor vehicles, motor cycles and parts by 2.4% y-o-y.

In 2009 retail sales at current prices climbed by 4.3% y-o-y. We believe that the softening of retail sales in January was in large part due to a stretch of harsh subzero temperatures, which kept consumers at home and made them forego less urgent purchases. 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.

 

 

January was the third consecutive month of slight acceleration in inflation. In the analysed period the consumer price index (CPI) amounted to 3.6% y-o-y, just exceeding the upper end of the central bank’s inflationary target range (2.5% y-o-y +/- 1 p.p.). The rise was however largely a statistical effect, resulting from a lower reference base.

The highest price increase in the 12 months up to January was noted in transport (a category that includes car fuel), where prices jumped by 10.9% y-o-y, followed by alcoholic beverages and tobacco products (up 7.6% y-o-y) and housing and energy (up 4.5% y-o-y). Prices of food and non-alcoholic beverages rose 3% y-o-y. By contrast, clothing and footwear prices fell by 4.9% y-o-y. On a month-on-month basis, the CPI was 0.5% y-o-y.

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[6], with a full-year forecast of 2.3%.

 

 

By contrast, the producer price index (PPI) slowed sharply compared with the previous month and amounted to 0.2% y-o-y in January. The result was significantly below market expectations, which were around 1% y-o-y.

Of Poland’s main industrial sectors, by far the steepest price increase (19.7% y-o-y) was noted in mining-quarrying. Prices in water supply, sewerage, waste management and remediation activities rose by 7.2% y-o-y, and in electricity, gas, steam and air conditioning supply they were up by 1.5% y-o-y. By contrast, in the manufacturing sector producer prices fell by 1.4% y-o-y. On a month-on-month basis, the PPI was 0.3% y-o-y.

In 2009 producer prices increased by 3.4%. In our view, the precipitous slowdown in producer price growth observed in January was primarily the result of a higher reference base and an update of the population of companies making up the enterprise sector, carried out by the GUS. We expect these factors to exert a major impact on producer prices in the months ahead as well. 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 February 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, although the job situation in developed economies remained difficult and access to credit tight; and that developing countries, especially China, were experiencing quickening economic growth. Meanwhile, initial GDP figures for the fourth quarter of 2009 as well as latest monthly macroeconomic data indicated that economic conditions in Poland were improving as well, the RPP said. Although the unemployment rate is creeping up, a stabilisation of employment in the enterprise sector seems to suggest that negative trends in the labour market are bottoming out, the Council reckons. Yet bank lending remains subdued, though banks expect it to increase in the months ahead.

In January the CPI increased slightly, driven by an acceleration in fuel prices (stemming largely from a low reference base). However, in the months ahead inflation is likely to slow, pulled down by a high reference base, weak demand, and the effects of the earlier appreciation of the zloty and the 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, the 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