Counting on consumption
Remember the heady days of 2004's bull market? Spirits were high, and so were predictions for Poland's GDP growth. At the end of December, the Finance Ministry proclaimed that growth for this year would reach five percent, while economists at the European Commission were predicting something around 4.9 percent. The fiscal outlook was good, as by year's end, the government had managed to slash zł.4 billion from the budget deficit.
Now, all the joy the bull market brought seems to be giving way to a gloomier outlook. Stocks took a major hit last month, with the Warsaw Stock Exchange's main index, the WIG, sliding over 1,000 points, or 3.63 percent. The Finance Ministry and the EU Commission have both now revised their expectations for this year downwards, to 4.5 and 4.4 respectively - disappointing, considering the government set a target to lower the deficit to 3.9 percent of GDP this year. The EU predicts the gap will be closer to 4.4 percent.
"We were all too optimistic," says Ryszard Petru, chief economist at Bank BPH. "We were thinking that this recovery was going to continue, while on the one hand investments were not growing so rapidly last year, and, on the other, wages were growing very slowly, so consumption was tempered."
Lower consumption hit businesses hard in the first quarter. Last month, NTC Research's Polish Purchasing Managers Index (PMI) dropped from 48.2 to 47.2 points - its lowest level since December 2002. According to the group, a number lower than 50 means a decrease in economic activity. March was the third month in a row that the number of new orders fell.
Dampening moods further was the Polish Confederation of Private Employers' (PKPP) Business Index, which fell for the fifth time last month. The group cited lower consumption as a major factor for the drop.
But experts say the dip is only temporary. They expect consumption to pick up by the second half of the year, fueled by a significant rise in investment.
"The signals from the economy are telling us that companies are preparing for investment, and capitalization is high, so this contributes to the view that investments will increase," says Petru. More investment means more consumption, which he believes should lead to five percent growth in the second half.
Rafał Antczak, an economist at Case Advisors, agrees that the investment trend is continuing, but worries about several complicating factors.
"There is a mixed picture. Investment is taking place in big companies, but in terms of SMEs there is virtually none, and investments by the government probably won't happen until the end of this year or the start of next year," he says. "An increased base of investment could also result in lower employment, due to the fact that there would be a tradeoff between labor and capital." If companies invest in technologies that replace workers, unemployment will grow, hindering consumption.
A better second half will also hinge on wage increases, which were expected last year but never materialized. "Nothing like that happened," says Antczak, who expects little change in wages this year. "You can't expect this trend [towards higher wages] with around a 20 percent unemployment rate."
One bright spot is that fears of a strong złoty seem misplaced. "We don't see the trend of the appreciation of the złoty resulting in lower export performance," says Antczak. Exports grew by nearly 30 percent in January, despite a Herculean Polish currency.
Still, experts believe strong export performance will have little or no impact on growth. They see domestic consumption, led by business investment, as the defining factor for the Polish economy's outlook this year. As Petru says: "Investment is the key."
Michał Dybuła, chief economist, BNP Paribas
Overall I think GDP growth will come somewhere in the range of 4.5 percent.
Certainly the situation will be more difficult than last year due to the fact that there is a strong base effect. We had strong growth in the first half of last year, so naturally you would expect that the growth rate would flatten out a bit.
The key factor will be the second half of the year, and what will happen to demand conditions, particularly in Germany, which is a major trading partner. If Germany is growing well, then we could see something like 4.6 or 4.7 percent, but if Germany doesn't pick up from what was the case last year then we'll probably end up with 4.2 or 4.3 percent.
Demand is already picking up. By the third quarter we will have very strong investment growth and we most likely will also get a pickup in private consumption.
For the whole year we do expect that investments will grow by roughly 7.5 or eight percent, while private consumption should increase by roughly 4.5 percent.
This takes into account all the effects coming from the labor market but also from direct EU farm aid, which will raise household disposable income by roughly zł.8 billion.
Rafał Antczak, economist, Case Advisors
Our forecast is around four percent.
[The lower forecasts are] not such a surprise for us because we kept our forecasts of around four percent growth for over half a year, so these are a bit more optimistic than ours. It is broadly agreed that there is no chance of reaching five percent growth this year.
Poland doesn't have strong fundamentals for growth on the household level, because wages are not growing, so you cannot expect demand from individuals to increase. When it comes to investment, we expect growth of eight to nine percent this year.
I would say in relative terms, the outlook is negative, because last year there was growth of over five percent, and this year there will be growth of four percent. It's not a low pace of growth but it comes at the expense of loosening fiscal policy or increasing the tax level, which is the story of this year and might be the story of next year.
We are actually losing time in an environment of relatively robust growth, as well as losing a chance of properly utilizing EU transfers. So this is relatively mild growth, which is positive in the medium term. Nevertheless, the postponement of fiscal consolidation would result in lowering growth and losing time during this relatively robust growth.
Now, all the joy the bull market brought seems to be giving way to a gloomier outlook. Stocks took a major hit last month, with the Warsaw Stock Exchange's main index, the WIG, sliding over 1,000 points, or 3.63 percent. The Finance Ministry and the EU Commission have both now revised their expectations for this year downwards, to 4.5 and 4.4 respectively - disappointing, considering the government set a target to lower the deficit to 3.9 percent of GDP this year. The EU predicts the gap will be closer to 4.4 percent.
"We were all too optimistic," says Ryszard Petru, chief economist at Bank BPH. "We were thinking that this recovery was going to continue, while on the one hand investments were not growing so rapidly last year, and, on the other, wages were growing very slowly, so consumption was tempered."
Lower consumption hit businesses hard in the first quarter. Last month, NTC Research's Polish Purchasing Managers Index (PMI) dropped from 48.2 to 47.2 points - its lowest level since December 2002. According to the group, a number lower than 50 means a decrease in economic activity. March was the third month in a row that the number of new orders fell.
Dampening moods further was the Polish Confederation of Private Employers' (PKPP) Business Index, which fell for the fifth time last month. The group cited lower consumption as a major factor for the drop.
But experts say the dip is only temporary. They expect consumption to pick up by the second half of the year, fueled by a significant rise in investment.
"The signals from the economy are telling us that companies are preparing for investment, and capitalization is high, so this contributes to the view that investments will increase," says Petru. More investment means more consumption, which he believes should lead to five percent growth in the second half.
Rafał Antczak, an economist at Case Advisors, agrees that the investment trend is continuing, but worries about several complicating factors.
"There is a mixed picture. Investment is taking place in big companies, but in terms of SMEs there is virtually none, and investments by the government probably won't happen until the end of this year or the start of next year," he says. "An increased base of investment could also result in lower employment, due to the fact that there would be a tradeoff between labor and capital." If companies invest in technologies that replace workers, unemployment will grow, hindering consumption.
A better second half will also hinge on wage increases, which were expected last year but never materialized. "Nothing like that happened," says Antczak, who expects little change in wages this year. "You can't expect this trend [towards higher wages] with around a 20 percent unemployment rate."
One bright spot is that fears of a strong złoty seem misplaced. "We don't see the trend of the appreciation of the złoty resulting in lower export performance," says Antczak. Exports grew by nearly 30 percent in January, despite a Herculean Polish currency.
Still, experts believe strong export performance will have little or no impact on growth. They see domestic consumption, led by business investment, as the defining factor for the Polish economy's outlook this year. As Petru says: "Investment is the key."
Michał Dybuła, chief economist, BNP Paribas
Overall I think GDP growth will come somewhere in the range of 4.5 percent.
Certainly the situation will be more difficult than last year due to the fact that there is a strong base effect. We had strong growth in the first half of last year, so naturally you would expect that the growth rate would flatten out a bit.
The key factor will be the second half of the year, and what will happen to demand conditions, particularly in Germany, which is a major trading partner. If Germany is growing well, then we could see something like 4.6 or 4.7 percent, but if Germany doesn't pick up from what was the case last year then we'll probably end up with 4.2 or 4.3 percent.
Demand is already picking up. By the third quarter we will have very strong investment growth and we most likely will also get a pickup in private consumption.
For the whole year we do expect that investments will grow by roughly 7.5 or eight percent, while private consumption should increase by roughly 4.5 percent.
This takes into account all the effects coming from the labor market but also from direct EU farm aid, which will raise household disposable income by roughly zł.8 billion.
Rafał Antczak, economist, Case Advisors
Our forecast is around four percent.
[The lower forecasts are] not such a surprise for us because we kept our forecasts of around four percent growth for over half a year, so these are a bit more optimistic than ours. It is broadly agreed that there is no chance of reaching five percent growth this year.
Poland doesn't have strong fundamentals for growth on the household level, because wages are not growing, so you cannot expect demand from individuals to increase. When it comes to investment, we expect growth of eight to nine percent this year.
I would say in relative terms, the outlook is negative, because last year there was growth of over five percent, and this year there will be growth of four percent. It's not a low pace of growth but it comes at the expense of loosening fiscal policy or increasing the tax level, which is the story of this year and might be the story of next year.
We are actually losing time in an environment of relatively robust growth, as well as losing a chance of properly utilizing EU transfers. So this is relatively mild growth, which is positive in the medium term. Nevertheless, the postponement of fiscal consolidation would result in lowering growth and losing time during this relatively robust growth.
