All (too) quiet on the western front
With two consecutive quarters of negative growth, the German economy is now officially in recession. Alex Nowacki reports on the ways that Poland will benefit - and suffer - as a result of the faltering economy on our western border.
The days when Europe's largest economy was also the powerhouse of its growth are now an increasingly distant memory. Even as Chancellor Gerhard Schroeder celebrated the hard-won battle to get his own party's approval for the government's modest plans for labor market reform, bad news kept pouring in from all corners.
The economy has shrunk for two consecutive quarters and the terrible "R" word is now being voiced quite openly.
"Technically, that's what you call a recession," said Andreas Cors of the Berlin-based Institute of Market Research (DIW). The Bundesbank has lowered its growth forecast for the whole year from 0.5 percent down to zero and even government officials are said to have admitted that the official 0.75-percent forecast is unrealistic.
Most economists are still, however, reluctant to use strong words.
"Germany is in stagnation rather than recession," said Jan Winiecki, president of the Polish Economists Association (TEP). "The only way to improve the condition of the economy is to drastically reduce labor costs and over-regulation of the market. But I don't believe they have been hit hard enough to accept the obvious."
If that is bad news for Chancellor Schroeder, it is no less so for the German giant's eastern neighbor.
Last year's meager growth in this country was possible only thanks to rising exports, and Germany is the country's largest trading partner by a wide margin, accounting for 32 percent of exports.
When your biggest export market is shrinking, it is never good news, but the situation may prove to defy the usual logic, as Polish exports have grown strongly during the latest German recession. Economists point out, however, that the effect the German slowdown has on this country's economy depends on Poland's own ability to adapt to the situation.
When asked to name the reasons for the poor economic performance of Germany, observers are unanimous in pointing to an over-regulated labor market. Ever since the early 1990s the cost of labor to employers has been rising steadily by 2 percent a year, while actual take-home pay has only increased by 0.2 percent annually, on average.
It is, therefore, not unreasonable to expect jobs "to bleed out of the economy," Winiecki said. The obvious direction that labor-intensive industries could go is across the eastern border, where the costs are much lower. Winiecki is, however, concerned about Poland's inability to attract extra investment.
"There's only one nation in Europe that works as few days in a year as the Germans," Winiecki explained. "That's Poland." He went on to point to rigid labor laws and the overly complicated and expensive tax system here as disincentives for investment.
The picture may not, however, be as bleak as all that. Last week Volkswagen announced its plans to expand production in Poland. A new delivery vehicle has just begun rolling off the assembly line at the company's Poznań plant and employment there is expected to rise from the current 3,700 to over 5,000 by 2005. This year alone will see the German car maker invest E178 million (zł. 750 million) in domestic companies. Although the company denies the investment may be a step towards reducing production at its German plants, observers unofficially question the practicality of maintaining production in Germany at its present level while expanding abroad.
The auto market in Germany has borne the brunt of the economic slowdown more than other sectors. That is bad news for one of the most dynamic exporters in this country, Inter Groclin Auto of Grodzisk Wielkopolski, in the western part of the country. The car upholstery manufacturer relies on exports for 98 percent of its revenue. While the successful quest to capture 12 percent of the EU market paid dividends at the time of the domestic car industry breakdown in the late 1990s, it may prove less profitable now that demand for cars is waning across the western border.
These are worries that must surely be shared by car manufacturers in the country. GM Opel Polska sells 95 percent of its production abroad and Germany is an important market, accounting for some 15 percent-20 percent of sales.
"The German situation has not yet had an impact on our sales," said Stanisław Byszewki, a GM Opel spokeman. "But we must watch the market very closely." He went on to say that it was hard to predict which way the market would go, as recently falling total car sales coincided with increasing sales of luxury cars.
Tomasz Kalinowski, advisor at the commercial and economic affairs department at the Polish embassy in Berlin, points out that the fall of demand for imports is likely to be felt with a delay of a quarter or two, once existing contracts are no longer renewed.
No wonder, then, that uncertainty has crept into car industry professionals' comments.
"I hope it (the German crisis) will have little impact," said Wojciech Drzewiecki, president of Samar, an automobile market monitoring agency. "I hope that other markets will compensate." He went on to say, however, that no scenario could be ruled out, as the whole of the European economy is far from booming. Drzewiecki remains hopeful that a recovery may be just around the corner.
There are some hopeful signs for exporters. The economic situation over the western border has not been encouraging for some time now, yet exports have been rising at a healthy rate. In the first quarter of the year exports grew by 2.5 percent on the previous year. While the dynamics of export growth are clearly on the down already, there is good reason to expect that Polish companies will maintain their market positions. Economists point out that Polish products are often seen as cheap alternatives to the products of Germany's domestic industries.
One example of this is Olsztyn-based Mebelplast. The furniture producer sells around 50 percent of its production to Germany.
"We recorded better export results in the first four months of this year (than in the corresponding period of 2002)," said Mebelplast president Stanisław Marek. "It is a sufficient basis (for the projection) that the whole year will be better than the previous one."
Tomasz Kalinowski of the Berlin embassy is convinced that Polish producers have established a reputation for lower prices and similar levels of product quality in comparison to those offered by western European manufacturers.
The outlook for Amica Wronki, the household appliance producer located in Wielkopolska, may not be quite as optimistic, but there's little reason for serious concern. Sales on the German market have stabilized and further deterioration of the market for Polish exports is unlikely, say market watchers.
It is therefore hardly surprising that, along with Austria, Germany negotiated a transition period of five years for the free transfer of services after Poland's accession to the EU. This is particularly worrying for local construction businesses, which have been allowed on the German market since 1990 in return for Poland's approval of German unification.
According to the German Construction Industry Association, the first quarter of this year saw the construction market shrink 15 percent compared to the corresponding period of the previous year, while as many as 87,000 jobs, or nearly 10 percent of total employment in the industry, were lost.
Julian Korman, president of the Association of Polish Service Companies in Germany (VdPD), finds the situation dramatic.
"The shrinking of the market is one thing," he said. "Another is that the reliability of contractors has fallen dramatically. Germans used to be renowned for their reliability, but now I don't think there's a company that hasn't been deprived of some earnings on a feeble pretext."
As the current situation has led to an increased demand for cheap labor - precisely what Polish companies have to offer - the German government has increased minimum wages in the construction sector. Korman has no doubt that this is a measure designed to limit Polish penetration of the market, as German workers were already paid more than the new minimum wage.
"We've got to survive until accession," he said, setting the limit to Polish entrepreneurs' ambitions in Germany. "In this terrible situation our only ambition is to survive."
