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1^st September 2008 - A Snapshot and Outlook for Poland's Economy.

As the press seems to be telling us on a daily basis at present, the economic situation in the most prominent countries of the developed world (USA, UK, Western Europe) is deteriorating rapidly, and these countries are experiencing the inevitable hangover brought on by the heady excesses of recent years and in particular the severity of the credit crunch. How does Poland compare? Growth in the wider Euro-zone is falling, but the old communist countries of Central And Eastern Europe (of which Poland is by far the largest) are still contributing high rates of economic growth, and look set to continue to do so in coming years. However, Poland will not be immune from a wider slowdown developing in Europe, and growth rates look set to fall from current levels. The most recent raft of economic data announced by Poland’s statistical office (GUS) for July 2008 paints a largely positive picture. On almost all fronts, the Polish economy is currently in pretty good shape, particularly in comparison to its European neighbors. Inevitably though, clouds are on the horizon and they are tracking towards Poland.

by Andrew Balfour

Unemployment

Poland’s level of unemployment continues to fall. Admittedly, it is still high, but the trajectory is positive and continuous. As at July, it stood at 9.4%. This compares to more than 15% when Poland joined the European Union in May 2004.

Retail Sales

According to the figures reported in July 2008, retail sales in Poland rose 14.3% year on year (compared to 14.2% in June 2008) with a monthly gain of 1.8%. Leading this growth was stronger sales of electronic appliances (up 26.3% year on year), pharmaceuticals (23.4%) and fuels (18.9%). Polish consumers willingness to spend more during the last year was probably spurred by a combination of the double-digit growth in wages during the past year and the expanding consumer credit sector in Poland.

Investment Spending

Large company’s outlays on investment in Poland rose by 18.6% year on year in the 1st half of 2008 to reach more than 46bn PLN (13.77bn EUR). This was comprised of 18.6% growth in fixed asset investment and more than 20% growth in construction and building investment

Gains in productivity not keeping up with wages growth

The rise in the productivity of Polish labor was 4.7% year on year in the first half of 2008, according to the statistics office, while gross wages grew by 10.9% and the average employment rate increased by 3.2%.

GDP Growth now and outlook for coming quarters

For the moment, the Financy ministry of Poland is sticking to its guns for the moment, expecting GDP growth in full-year 2008 to average 5.5%. However, the receipt of official 1st half 2008 is imminent, and the ministry doesn’t rule out a change to their prediction, with the overwhelming belief that this is likely to be a downward revision.

Piotr Kalisz, a senior economist from Citibank in Poland, believes that economic growth will slow in the coming quarters due to weaker net exports and slowing investment growth. Kalisz is of the opinion that in the near future Poland will begin to suffer the knock-on effects of an economic downturn in Germany and other large economies within the Euro-zone. It’s not all bad news. The negative risk described above should be partially offset by continuing strength in demand from the average Polish consumer which will be stoked by tax cuts announced for 2009.

According to Kalisz and other respected Polish economists, there is a strong likelihood that GDP growth in Poland during 2009 will fall below 5%, perhaps even lower than 4%. Whilst 4% GDP growth in Poland will look disappointing compared to the experience of recent years, it is set to compare to virtually zero growth in more established Euro-zone economies, or even recession.

Direction of interest rates in Poland

The 18 month tightening cycle which Poland’s central bank has been implementing in response to higher inflation is set to be put on hold for the time being. At it’s most recent meeting (for August), the monetary policy council elected to leave interest unchanged at 6%. Most economists believe that the current tightening cycle is either finished or close to it’s conclusion. Wages growth and inflation are still high, which may result in at most one or two more quarter basis point rises in the next six months. However, the slowing economic growth (and falling inflation) expected in 2009 will more than likely see the council’s bias tip towards loosening monetary policy next year. A fall in Polish interest rates by up to 1% can be reasonably expected in 2009.

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