German Imports Key to Polish Rebound [ANALYSIS]

Is Poland’s economy ready for a rebound? That is the question economists and the business community – not to mention the average Kowalski – are asking themselves as Poland slogs through another year of slow growth. Now, just after the midway point of the year, the economy remains sluggish and unemployment high. But there are indications that Poland may just be turning the corner.

German Imports Key to Polish Rebound [ANALYSIS]

Firstly, it’s important to note that major government and global institutions are expecting Poland’s economy to pick up speed. In the first quarter, Poland’s gross domestic product grew at a rate of 0.5 percent compared to the same quarter of 2012, its slowest pace since Q1 2009. Poland’s statistics office, GUS, hasn’t revealed second-quarter GDP growth figures yet, but economists think that economic growth sped up to a rate of 0.7-0.8 percent. By the end of the year though, both the National Bank of Poland and the International Monetary Fund expect Poland’s GDP to grow by 1.1 percent. The Gda?sk Institute for Market Economics (IBnGR), a think tank, expects Poland’s economy to grow by 1.2 percent. In order to achieve that, growth will have to speed up significantly in the second half of the year.

Source: Central Statistical Office

There are signs that a recovery could be coming. Two forward-looking indicators calculated by the Bureau for Investments and Economic Cycles (BIEC) – one on the general economic climate and one on the labor market – show positive signs. BIEC’s economic climate indicator reached 146.1 points in June, an increase of 4.2 points, the largest such rise in nearly three years. The bureau’s labor market indicator was also positive: it fell two months in a row in June and July, a strong signal that a drop in the unemployment rate is on the cards. Economists at the bureau said the figures indicated that a rebound in the second half of the year was becoming more likely.

In a hopeful signal for businesses looking for capital and households looking for loans, the Pengab banking sector sentiment indicator, calculated by the Polish Bank Association (ZBP) and pollster TNS Polska, grew by 5.2 points month-on-month to 11.3 points in July. Polish bankers’ forecasts for corporate loans grew, as did the forecast for household loans.

But the strongest signal yet that Poland’s economy is on its way up was the Purchasing Managers’ Index, which in July showed that the country’s manufacturing sector was finally growing, after 15 months of contraction. The index score was 51.1 – any score above 50 indicates an improvement in business conditions, and it was the first such reading since March 2012. The score beat analysts’ expectations. Economists said it was a harbinger of stronger growth in the second half, with those from Citi Handlowy, Citibank’s Polish arm, saying growth in H2 could reach as high as 1.5-2 percent.

Three keys

If Poland’s economy does indeed post much stronger growth in the second half of this year than it did in the first half, three key factors will have to align. First, domestic consumption (the engine that powered Poland’s economy during the first years of the global economic slowdown) will have to pick back up from their current doldrums. Second, investment – both foreign and domestic – will have to increase. Finally, exports, one of the few bright spots in Poland’s economy in the first half of the year, will have to continue to remain strong. Much of that will depend on the health of the economy of Poland’s largest trading partner, Germany.

Consumers ready to spend again?

By now most economists agree that the biggest factor that made Poland the only EU country not to go into recession in 2009 was strong domestic consumption. Powered by a flood of EU funding and government spending on construction projects, Polish wages continued to grow throughout the crisis, and consumers continued to spend. That lasted through 2011, when retail sales averaged annualized growth of a whopping 11.5 percent each month.

Source: Central Statistical Office

But by the second quarter of 2012, that growth had slowed sharply to about 6.5 percent. In the third quarter of that year it slowed to 5.3, and the fourth quarter, to just over 1 percent. In December, when the holiday season traditionally leads Poles to open their wallets, retail sales actually dropped by a full 2.5 percent. The slowdown had reached such proportions that Poles had decided to spend less on Christmas gifts and trimmings than the year before.

Economic growth followed the same trajectory, growing a relatively strong 3.5 percent in the first quarter, and then slowing to 2.3 percent in the second, to 1.3 percent in the third and 0.7 percent in the fourth quarter.

While retail sales rebounded slightly in January this year, to 3.1 percent, subsequent months saw spending fall back down, and economic growth with it. But the above-mentioned manufacturing numbers indicate consumers may be buying again. Indeed, the report’s authors said domestic demand was one of the factors behind the growth.

And there’s more evidence that consumers may have decided to spend again. Retail sales increased by 1.8 percent year-on-year in June. While that’s a far cry from the heady days of 2011, the figures were a strong improvement on the previous month’s 0.5 percent growth and strongly beat market expectations of just 1.1 percent.

Economists from Bank Zachodni WBK said that they expected the trend to last for several months. “We expect the pace of growth of retail sales to reach ca. 2 percent in H2 vs. 0.8 percent in H1 2013,” they wrote in an e-mail. Citi economists also said that the figures were a good sign of going forward. “All in all the improvement in real sales in Q2 was quite substantial, which we treat as a positive signal for GDP growth,” they said.

Moreover, the “Carrefour Barometer” an index of consumer sentiment compiled by IBnGR for the Polish branch of the FMCG retailer, grew by 1.9 points in July and amounted to -11 points. While the indicator was still in negative territory, it was also the second time the index had grown month-on-month. In June, it had increased by 2.6 points compared to May. The researchers that compiled the report said that factors behind the growth included increases in consumers’ propensity to buy and in consumer confidence.

One reason Poles may be more willing to spend is that the labor market is looking more favorable. Wages in the corporate sector grew by 1.4 percent in June – slower than the previous month, but continuing a growth trend that economists saw as positive. Employment also grew in June by 0.8 percent y/y. Analysts had expected it to decline by 0.9 percent.

This was already [the] second month in a row of rising employment,” BZ WBK economists wrote. “We find this a positive sign though it is too early to say for sure whether this was due to higher seasonal activity or some broader revival,” they added.

Unemployment also dropped in June, to 13.2 percent. While this was mostly due to seasonal factors, economists at Citi said the data suggested that there were “signs of stabilization in the labor market.” “Combining this with previously published data on employment growth it seems the labor market may be actually (albeit very slowly) turning the corner,” they added.

Source: Central Statistical Office

Investment on the up?

As Poland geared up to host the 2012 European soccer championships along with Ukraine, investment by both the government and private firms reached record levels, totaling over z?.300 billion in 2011. But once the games were over, the government began spending less on infrastructure. Moreover, to meet budget goals, the government froze public sector wages and cut administrative spending.

That was met with a wind-down of EU fund spending, as the seven-year budget period for which the funding is allotted began nearing its 2013 end date. Firms pulled in as well – and that was especially true of construction firms, which had overstretched during the pre-Euro 2012 building frenzy. The sector saw a wave of bankruptcies.

A huge drop in the value of foreign direct investment did not help matters. Early estimates from the National Bank of Poland put FDI into Poland in 2012 at just €5 billion, a huge drop from the €13.6 billion in 2011.

So how much will change in the second half of this year? When it comes to government investment, Prime Minister Tusk will be hard-pressed to increase budget spending. Already he has been forced to increase the budget deficit for this year due to tax revenues undershooting expectations by an estimated z?.24 billion. His government has proposed over z?.8 billion in spending cuts and has had to change legislation in order to increase the deficit by z?.16 billion, or 47 percent of the originally proposed z?.35.6 billion.

However, early last year the government created an investments program, called Polish Investments, which would be managed by a special investment vehicle that would gain capital by leveraging stakes in state-owned firms, thereby keeping the spending off the government’s budget books. Polish Investments has already signed on to its first investment, the construction of a rail line in Gda?sk, but the program isn’t expected to give a significant boost to the economy until the first half of next year.

Nevertheless, investment may be picking up in the private sector. According to data collected by daily Rzeczpospolita, in the first half of 2013 companies declared investment outlays of z?.2.84 billion in Poland’s special economic zones. The figure is almost z?.370 million higher than during the same period of 2012. The number of planned new jobs also increased from 2,452 a year ago to as many as 3,790. SEZs have also issued 91 investment permits, nine more than a year earlier. The data was better than analysts had expected. Last year investment value decreased in SEZs, as did the number of permits issued and the number of new jobs planned.

In terms of FDI, the jury is still out as to whether Poland will attract more than it did last year, but Poland has received some high marks in investment attractiveness rankings. Surveys by both Ernst & Young and the German-Polish Chamber of Industry and Commerce listed Poland as the most attractive investment destination in the region. And while the value of FDI fell in Poland last year, the number of projects increased strongly, indicating that firms were still interested in investing in the country.

Finally, while Poland will have to wait until at least next year before it sees a significant inflow of EU funds from the next budget period, the European Investment Bank has said that it is increasing its investment volume in Poland this year to €5.5 billion.

Exports and Germany

Amid falling GDP, sales, consumption and investment figures last year, exports remained a hopeful bright spot. In 2012 Poland exported €143.5 billion worth of goods and services, according to data compiled by Poland’s statistics office. The figure was a record high and indicated an increase of 4.9 percent year-on-year.

But for Poland to boost growth in the second half of this year, that trend will have to continue, and the signs on this front are positive. Polish exports amounted to €12.87 billion in June, according to estimates from the Export Credit Insurance Corporation (KUKE), posting growth of 8.2 percent year-on-year. For the whole of 2013, exports should reach €158.3 billion, KUKE said, a rise of over 10 percent on last year.

While foodstuffs, chemicals, and products from the metallurgy sector are important exports for Poland, machinery comprises the largest share of the country’s exports, worth about €56 billion last year. Germany, by far Poland’s largest export market and accounting for over a quarter of the goods Poland sells outside its borders, is a big market for all of these goods, but especially machinery. Polish-made components go into many of the finished products created by Germany’s enormous manufacturing sector, so the health of its economy, and especially its manufacturers, are an important factor in how well Poland’s exports fare.

Optimistically, Germany’s manufacturing sector PMI figures for July showed positive business conditions, with a score of 50.7, an 18-month high. “A solid expansion of production levels and rising volumes of new work were the main positive influences on the headline index in July,” said the report accompanying the data release.

Importantly, the increase occurred despite slowing demand from China and the euro zone. “Improvements in the manufacturing sector were heavily linked to greater domestic spending, which stood in contrast to weakness evident abroad, as subdued demand from China and within the euro area kept new export work on a downward tilt,” said Tim Moore, a senior economist at Markit, which compiled the data.

Questions abound

Put together, these factors show that Poland has a better-than-even chance of increasing its economic growth in the second half of this year. But the degree remains questionable – no one is sure just how strong the rebound will be, if it does indeed come. Economists seem to agree that Poland’s GDP will grow at a rate of about 1 percent or slightly faster this year, the slowest pace since 2001. If Poland wants to catch up to the development level of its Western European neighbors, it needs to grow much faster – at a rate of between 4 and 5 percent at least, experts say.

Polish businesses aren’t expecting huge improvement this year. A survey by the NBP showed they don’t expect conditions to improve until sometime in 2014. “In Q3 the respondents expect a slight increase in demand and an improvement of the situation, however they do not see it as an economic rebound,” the NBP’s report read.

But whether recovery comes within the next six months or the next 18 months is less important than whether it comes at all. Right now, the signs in the Polish economy look good. But if the global economic whirlwinds of the past five years have taught us anything, it’s that the outlook can reverse at a moment’s notice, often due to changes in economies far removed from one’s own. For that reason, Polish businesses will be hoping that what looks like a nascent global economic recovery continues.

German Imports Key to Polish Rebound is republished with permission of Stratfor.”