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The Warsaw Voice » Other » September 3, 2008
ECONOMY
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Strong Despite Slowdown Fears
September 3, 2008 By Andrzej Ratajczyk   
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The economy is expected to slow a little this year, but GDP will still likely grow almost three times as fast as in the EU as a whole.

Even though economists have been predicting a slowdown in the Polish economy for some time now, macroeconomic data have not confirmed these forecasts so far. Data from the Central Statistical Office (GUS) show that GDP grew 6.1 percent in the first quarter of this year compared with the same period last year. Preliminary data by the economy ministry show that the GDP growth rate in the second quarter was 5.9 percent, with a projection of 5.5 percent for the whole year. The finance ministry, however, notes that there is a risk of a slowdown in the longer term. Under the targets for the 2009 budget, the GDP growth rate next year is projected at 5 percent. Last year Poland's GDP grew by 6.6 percent.

Today few economies in Europe are growing as fast as Poland. Practically all the countries in the region are slowing down. The only exception is Slovakia, where GDP grew 8.7 percent in the first quarter, largely due to foreign direct investment. Lithuania also grew faster than Poland in the first quarter, at 6.9 percent, but the Lithuanian economy is losing momentum. The two other Baltic states-Estonia and Latvia-cannot compare to Poland any longer, their economies showing serious signs of overheating. Inflation in Estonia and Latvia is in double-digit territory and economic growth has all but halted. The Czech economy has also slowed down more markedly than the Polish economy, mainly due to weakening demand at home.

The International Monetary Fund (IMF) warned in its recent report that Europe would feel the effects of a global slowdown, coupled with growing prices of raw materials and a crisis on financial markets. In developed economies, GDP growth is expected to decelerate to 1.5 percent on average, from 2.8 percent last year. In turn, new EU member states are expected to slow down from 6.2 percent to 4.6 percent on average. IMF economists predict that the Polish economy will decelerate to 4.9 percent this year, followed by 4.5 percent next year. However, the good news is that this will still be one of the best figures among new EU member states.

The European Commission, in its spring economic forecast for EU member states, said that economic growth in EU countries would decelerate. The forecast says that EU economies will grow by 1.8 percent on average in 2008, followed by 1.7 percent next year. The GDP growth forecast for new EU member states is 4.6 percent this year and 4.3 percent next year.

In most Central European countries, GDP growth continues to run at a relatively high level. The European Commission forecast for Poland is 5.3 percent this year and 5 percent next year. Earlier the European Commission projected 5.6 percent. Slovakia is expected to report the best result in the region, with 7-percent GDP growth this year, while Hungary is expected to be the worst performer, with a growth rate of just 1.9 percent.

Limited impact
According to the European Commission, the recent international financial turmoil is expected to have a limited effect on the Polish economy due to factors such as strong demand for housing fueled by rising employment and wages. As investment and consumption grow, imports are expected to increase by 10.5 percent in 2008, while export growth is expected to slow down to 6.9 percent this year, from 9.1 percent in 2007, due to lower external demand in those EU countries that are Poland's main trading partners.

Polish economists also predict a slight slowdown. According to a macroeconomic forecast released by the Gdańsk Institute for Market Economics (IBnGR) in August, the Polish economy will grow 5.5 percent this year, and then decelerate to 5.1 percent in 2009. The institute's experts say that in the coming years the Polish economy will be driven by construction, domestic demand and investment (despite a temporary slowdown), while inflation may be putting the brakes on GDP growth.

The country's rapid economic growth has led to a prolonged appreciation of the Polish currency. In July, the zloty traded at 3.20 to the euro and 2.02 to the dollar. The main driving force behind the zloty's appreciation is the good performance of the Polish economy, coupled with what is happening on international markets. Like other countries in the region, Poland is frequently perceived as an attractive alternative to highly developed countries. In times of uncertainty on global markets, investors are particularly keen to search for rapidly developing countries that often prove to be better destinations for investment.

Strong zloty: good for some
The continued appreciation of the Polish currency makes consumers happy, but at the same time it means trouble for exporters because a stronger zloty is hurting the profitability and competitiveness of Polish products on markets abroad. Despite this, exports continue to be a key driver in the country's economic growth. Last year Polish companies exported a record of over 101 billion euros worth of goods and services. So far neither the strong zloty nor problems experienced by other European economies have hampered Polish exports. This seems to indicate that negative economic trends in Europe do not have to spell trouble for Polish exporters. Just the reverse, at a time of a downswing, importers look for cheaper substitutes for products they bought previously, and Polish companies can grab this opportunity.

Poland owes its continuing high rate of export growth to its businesses which have been able to exploit demand abroad, especially in the European Union. Exports have driven the Polish economy for several years now, and a strong zloty has not been a great problem because companies continue to restructure and cut costs.

Another reason why export growth has been so high is that foreign-owned companies account for a large percentage of Polish exporters. They import supplies from their subsidiaries and affiliates outside Poland and are largely immune to exchange rate fluctuations and an appreciating zloty. The contribution of foreign-owned companies to Poland's exports is steadily growing and has already exceeded 60 percent. Foreign-owned companies are usually less sensitive to temporary economic slowdowns and have greater funding opportunities and an ability to win new markets. These advantages help them achieve a much higher rate of growth in exports compared with Polish-owned companies.

There is every indication that Poland's exports performance in 2008 will not be much worse than in 2007, experts say. According to the central bank's latest projections, the country's foreign trade may continue to grow fast. Exports are expected to increase by 9.5 percent in 2008 and 2009 and by 9.9 percent in 2010. Central bank experts say this fast growth should not be affected by either a strong zloty or slower economic growth in the eurozone and the United States.

Poland is still popular as an investment destination for large international corporations. Last year foreign companies invested almost 13 billion euros in Poland. This year, the value of foreign direct investment (FDI) may be even higher.

According to data from Poland's central bank, FDI in Poland in 2007 totaled 12.83 billion euros. Last year's figure was lower than that in 2006, when FDI reached almost 15.1 billion euros. However, 3.1 billion euros of the 2006 total was capital in transit, or money that a foreign investor in Poland received from the parent company to be invested in another country. With its 2007 FDI figure, Poland kept its first place among new EU countries in terms of foreign investment inflow.

The FDI flow and investment attractiveness league tables confirm that the interest in Poland as a prime investment location is growing among foreign companies. Poland tops the Federation of European Employers' (FedEE) list of 31 European countries in terms of investment attractiveness. The list includes 27 EU countries as well as Iceland, Norway, Switzerland and Turkey. The FedEE takes into account 15 factors including access to labor, human capital, labor market relations, labor market flexibility, inflation and labor costs.

International real estate services company Cushman & Wakefield has ranked Poland in fifth place among the most attractive investment locations in Europe, after Belgium, which tops the list, the Netherlands and Hungary. The Czech Republic ranks fourth, being the third most attractive location in Central and Eastern Europe among the top five. Cushman & Wakefield's European Distribution Report 2008 looks at 25 countries in terms of their attractiveness as a location for industrial and logistics operations.

Not only the amount but also the quality of capital invested in Poland is important. Poland is no longer interested in attracting just any investment project. It is chiefly interested in technologically advanced projects that create jobs for university graduates. Projects that meet stringent environmental protection requirements, guarantee low carbon dioxide emissions, and create competition for existing companies, for example, are particularly desirable in Poland these days. Not all sectors are equally promising, and some investors demand excessive support from either the central government or local authorities. Especially welcome are companies that invest in research and development centers and carry out projects in sectors such as aerospace, the motor industry, engineering, biotechnology, information technology and green energy. These sectors will determine the future economic development of the country and offer the best prospects for growth. Business Process Outsourcing (BPO) is one of the sectors that has been especially popular with investors in recent years.

According to the Confederation of Polish Employers (KPP), the country's FDI performance would be even better were it not for Poland's poorly developed infrastructure, ailing transport systems and lack of government response to changes in the labor market. To attract more investors, the authorities should reduce bureaucracy, upgrade the court system, and create a stable and predictable political environment, the organization says. All these measures are indispensable if the government wants to avert a threat posed by the country's declining competitive advantage based on low labor costs. Other threats include growing competition from other countries in Europe; poor adaptation of the education system to what happens on the labor market; loss of human capital, chiefly due to emigration; and failure to take advantage of the country's economic growth to reform the budget and reduce taxes, the organization says.
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