An unbalanced diet
Growing food prices have been making headlines around the world for some time now. In February, for example, food riots crippled major towns in Burkina Faso. Similar riots shook the Indian state of West Bengal last October and there were large, sometimes violent, protests against in places like Mexico and Morocco in 2007, over rising tortilla and bread prices respectively. The reasons for appreciating prices vary, but the effect is the same - staple products growing prohibitively expensive for the average consumer.
In Poland, the prices of general goods and services are also on the rise, reaching 0.4 percent m/m growth in April, according to data from the Central Statistical Office (GUS). Prices of food, alcohol and tobacco products grew by 0.6 percent in that period and y/y growth to April amounted to 6.6 percent.
Marcin Nowicki, an expert from the Gdańsk Institute for Market Economics (IBnGR), argued that rising food prices result from speculation on the global food market. "Foods have become a very attractive market for speculators, especially since financial markets are less stable," Nowicki said.
On the other hand, Krystyna Świetlik from the Institute of Agricultural and Food Economics - National Research Institute (IERiGŻ-PIB), said that the growth of food prices was the result of developing countries' growing economies. "The rise of oil prices as well as growing demand in developing countries such as China are the key factors," she said, adding that this impacts the prices of other goods and services as well.
Appreciating inflation
In contrast to food prices, household energy costs in Poland saw no change between March and April, but y/y growth amounted to 7.2 percent. Electricity prices are growing for several reasons, according to Sobieski Institute analyst Tomasz Chmal. The European Union's requirement that member states increase the percentage of renewables in their total energy consumption is one reason. Other reasons, according to Chmal, include the growing costs of coal and CO2 emissions.
But the effects of the global trend of rising food and energy prices are counterbalanced in Poland by the strong position of the Polish currency, Nowicki said. "This is a buffer of sorts against global processes," he noted, adding that the złoty would remain in a strong position for the foreseeable future thanks to EU structural funds and growing exports.
The strength of the złoty could be challenged by inflation, however. According to the Organization for Economic Co-operation and Development (OECD), inflation may exceed five percent this year and could reach up to 8.4 percent next year.
Other analysts echoed this sentiment. "It will also be difficult to control [inflation]," warned Andrzej Arendarski, the president of the Polish Chamber of Commerce (KIG). Rising inflation could also delay Poland's adoption of the euro, he noted.
Andrzej Sadowski, the vice president of the Adam Smith Research Institute (CAS), added that inflation would also be driven by the amount of money coming in from abroad. "As much as zł.15 billion flowed in last year, although the actual amount may be much higher since these are only official estimates," he said. "It is as if someone introduced a giant amount of additional money to the market. This process has an effect on the shaping of prices and cannot be ignored when analyzing the economic situation," he noted.
Low-calorie salaries
In Poland, food comprises 25-30 percent of total household spending, on average, and according to KIG's Arendarski, rising prices could prove a huge blow for consumers and, therefore, the Polish economy. "This will affect the worst-off first," he noted. He stressed, however, that the rising prices were mirrored by simultaneous wage rises.
The average monthly salary surpassed zł.2,983.98 gross in Q1 of this year, according to GUS. At the end of last year the figure stood at zł.2,691.03, 8.7 percent higher than in the same period of 2006. At the end of 2007, the average monthly wage in the public sector was zł.3,046.54 (eight percent y/y growth), while the average in the private sector was zł.2,564.63 (9.6 percent). The purchasing power parity of the average monthly wage at the end of 2007 was 6.3 percent higher than in 2006.
But many workers feel that growing salaries are not adequately compensating for price growth. The All-Poland Alliance of Trade Unions (OPZZ), for example, recently announced that it would demand a 15-percent pay rise for public-sector employees. In the case of teachers, the union could ask for as much as 50 percent.
OPZZ's demands may go unmet, though, given the government's recently announced plan to seek up to zł.8 billion in savings from the national budget. The plan aims to decrease the budget deficit by 0.5 percent to two percent of GDP in order to meet the Maastricht criteria for adopting the euro.
Continuing wage growth?
Indeed, the growth in wages may slow, as pressure on employers eases due to an expected drop in economic emigrants. With the wage gap between Poland and Western European countries continuing to narrow, fewer young people are seeking their fortunes abroad.
"[These people] are not able to pressure [their employers] with the need to keep them in Poland, thus the potential for salary growth is decreasing," said Marek Dietl, a retail expert from Simon-Kucher & Partners (SK&P). He also noted that returning emigrants would increase competition in the labor market.
But KIG's Arendarski disagreed, doubting that the number of skilled workers returning would be large enough to affect the domestic labor market. "Many of these people have already started new lives abroad," he said, noting that the group most likely to return was manual workers.
Despite the higher prices and the inauspicious outlook for wage growth, consumer optimism remains high, according to SK&P's Dietl. "For example, the [upper mid-class] Volkswagen Passat is still the seventh most frequently bought car," he said. He admitted, though, that many people's lifestyles exceed their means.
Borrowed time
The growing food and utilities prices are not likely to affect the mortgage and consumer loan markets significantly, according to Mateusz Ostrowski, an analyst at Open Finance. Still, he noted that the 13 percent of borrowers who had problems repaying their debts last year was unlikely to decrease this year.
But Ostrowski also noted that lending institutions were working to make qualifying conditions for loans stricter even as they moved to make the procedures themselves simpler. "This is a warning sign," he said.
Rising prices and impending inflation may be all the more serious since Poland's GDP growth is not expected to be as robust as last year. "The Polish economy is flourishing compared to the rest of the world, but the first symptoms of a slowdown are appearing," said SK&P's Dietl. "This can be seen on the bourse - firms issuing shares have lower prices and investors are being more careful," he said.
The slowdown in the global economy will also affect foreign investments to Poland, according to Dietl. Some 25 percent of Poland's GDP is generated by foreign investments.
Salves for the market
CAS' Sadowski said that the only remedy for growing food prices was to increase imports. "It is impossible to stop [price growth] without the free market mechanism," he said.
IBnGR's Nowicki added that any attempt by the government to lower the złoty's value would be the wrong move. "If we avoid [devaluation], we will have a buffer," he said. The only way to increase wages and keep inflation low is to lower labor costs, Nowicki added. Another factor, economic efficiency, remains relatively low and is unlikely to change in the near future.
"Economic efficiency in Poland amounts to 40 percent of the EU average," Nowicki said. He noted that while Poles have one of the highest hours-worked-per-year averages in the EU, the ratio of hours worked to sales revenues was low, partly because of the poor brand image Poland has abroad.
"This is changing since more and more consumers abroad are beginning to appreciate the quality and low price of Polish products," Nowicki said. He also stressed that engaging over-50s who are currently outside the work force was necessary if Poland is to to fight the labor shortage.
Waiting for reforms
The experts WBJ interviewed for this article said that radical reforms to public finance and bureaucracy - reforms which the ruling Civic Platform party promised during last autumn's elections and which remain unrealized - were crucial for the future health of the economy.
"Steps are being taken by the government … but bureaucrats need to see more determination on the part of the prime minister," KIG's Arendarski said. CAS' Sadowski stressed that even if the government is aware of the need for reform, it lacks decisiveness.
According to IBnGR's Marcin Nowicki, although little headway has been made toward thorough reforms, hope remains that they are being prepared and that government will soon unveil new measures.
"If they are analyzing the situation and quietly working on reforms, that is good. But if the government is only about PR, we will have problems in the future," he said.
