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The Warsaw Voice » Business » December 30, 2010
Economy in 2011
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Growth Expected to Continue
December 30, 2010   
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Most forecasts indicate that Poland will remain one of Europe’s fastest growing economies in 2011.

In 2009, Poland recorded 1.7-percent GDP growth and was the only European Union country to avoid recession in the aftermath of the global financial and economic crisis. In 2010, Poland’s economic growth accelerated to 3.4-3.6 percent, and a similar figure is expected in 2011.

Under the 2011 budget bill, the government’s target for GDP growth in 2011 is 3.5 percent; the average annual inflation rate is expected to reach 2.3 percent, and the unemployment rate is projected at 9.9 percent at the end of 2011. The target for government revenue is zl.273.27 billion, while public spending is expected to remain below zl.313.47 billion, with the public deficit not exceeding zl.40.2 billion, down from zl.52.2 billion planned in the 2010 budget. To bring down the deficit, the government wants to increase its revenue by raising VAT rates, in a move that is expected to yield zl.5 billion, and by cutting the expenses of individual ministries.

Optimistic forecasts
Whether the budget plans can work in reality will depend on Poland’s ability to maintain its rapid economic growth. So far the economy has performed well. Data from the Central Statistical Office indicates that in the third quarter of 2010, Poland’s GDP grew 4.2 percent, up from 3.5 percent in the previous quarter. Forecasts for the next few months are also optimistic.

In its fall forecast, the European Commission put Poland’s GDP growth in 2010 at 3.5 percent. Until recently, Poland topped EU economic growth statistics, along with Slovakia, but the latest preliminary data show that in 2010 Poland was outdone by Germany, whose economy grew 3.7 percent, and by Slovakia, at 4.1 percent, and Sweden, at 4.8 percent. However, growth in these three countries is expected to decelerate in 2011, while Poland’s economy is expected to continue to grow at a fast rate.

In its report, the European Commission envisions a strong revival in Poland’s economy in 2011, attributing it to domestic demand driven by a steady improvement on the labor market, growing consumer and business confidence and an intensified inflow of funds from abroad. According to the European Commission, Poland’s GDP will grow 3.9 percent in 2011, and the revival is expected to be even more pronounced in 2012 owing to foreign investment and an overall improvement in international markets.

Employment in Poland is expected to rise by 0.7 percent in 2010 and 1.3 percent in 2011. The unemployment rate, calculated according to the method used by the EU’s statistics office, the Eurostat, is expected to peak at 9.5 percent in 2010 and then gradually subside to 9.2 percent in 2011 and 8.5 percent in 2012.

European Commission experts believe that as the Euro 2012 soccer championships in Poland and Ukraine approach, public investment projects will gain momentum, but the increase may be hampered by measures that the government will need to take to consolidate public finances.

The World Bank is also confident about the resilience of Poland’s economy. In its November report, the bank revised its GDP growth forecast for Poland upward to 3.5 percent in 2010 and 4.1 percent in 2011. Back in July, World Bank economists predicted that GDP growth would reach no more than 3 percent in 2010 and 3.7 percent in 2011.

According to the World Bank, the Polish economy will be driven by growing consumption and private investment in 2011.

According to Kaspar Richter, a senior economist with the World Bank, economic growth in most countries in the region is driven by exports. In Poland, private investment and consumption will be the driving forces behind economic growth, Richter said, adding that Poland and the Czech Republic were the only countries where consumption went up in the second quarter of 2010.

Analysts from ING Investment Management (Polska) are even more optimistic, estimating that Poland’s GDP grew 4 percent in 2010 and predicting 4.5 percent for 2011.

Maciej Bombol, investment director at ING Investment Management (Polska), says private consumption, stable public consumption and private investment will be the key drivers of Poland’s economic growth in 2011.

The current inventory restocking cycle will probably end in the first half of 2011, and will have a neutral effect on economic growth, Bombol says. Net exports, on the other hand, are emerging as a risk that may harm economic growth now that imports are growing faster than exports. Poland’s central bank expects exports to increase around 8.8 percent and imports to grow 11 percent in 2011, with the trade deficit growing to around 2.1 percent of the GDP.

ING Investment Management says the Polish zloty is still one of the most undervalued emerging-market currencies, and so in 2011 the Polish currency should appreciate against the euro. Since the country’s economic growth is based on consumption and investment, two factors that add to inflation, ING Investment Management expects that the prices of goods and services will rise in 2011.

“In the whole of 2011, the inflation rate will reach around 3-3.5 percent,” said Bombol. “We are anticipating a succession of interest rate increases at regular intervals throughout the year, totaling at least 100 basis points.”

Trouble with public finances
Experts caution that the projected, relatively fast economic growth should not become a distraction from problems that Poland will have to attend to. In its forecast for Poland, the European Commission noted that efforts to improve public finances have been too slow.

“The Polish public finances have deteriorated considerably during the economic and financial crisis which hit Poland in 2008-2009,” the Commission said in a report. “A substantial stimulus package helped Poland to stay on a growth track, however, it resulted in a sizable increase in the headline deficit to 7.2 percent of GDP in 2009. In 2010, despite higher than projected growth and a few consolidation measures, such as a 1-percent VAT rate increase and a nominal freeze in public sector wages, the headline deficit is expected to reach 7.9 of the GDP.”

This further deterioration is attributable mainly to lower revenues from corporate income tax, higher consumption and investment expenditure by local governments, and higher debt service expenditure.

The European Commission expects Poland’s public debt to increase to 55.5 percent of the GDP in 2010 and 57.2 percent in 2011. In 2012, the debt may reach 59.6 percent and thus approach the maximum 60-percent level permitted by the Polish constitution. According to the Commission, the sharp increase is due to the high budget deficit.

The risks posed by public finances have also drawn the attention of other international financial institutions. The Fitch Ratings agency has noted in a report that public finances need to be consolidated if Poland is to retain its long-term foreign-currency credit rating at A- with a stable outlook and the national-currency rating at A.

Poland’s deficit keeps growing despite the fact that the country has survived the recession intact and its banking sector did not need a government bailout, Fitch Ratings noted.

Stock market: nowhere but up
Last year was a year of major privatization projects in Poland, with some of Europe’s largest initial public offerings. Newly listed companies on the Warsaw Stock Exchange included insurance giant PZU, energy company Tauron and the Warsaw Stock Exchange company itself. They were joined by many smaller companies sold through public offerings and tenders. Prospects for this year are equally promising.

The government wants to earn a total of zl.55 billion between 2010 and 2013 from the sale of shares in companies owned and co-owned by the Treasury. In 2010, the Treasury was expected to earn zl.25 billion and there is every indication that the goal was accomplished. In 2011, privatization revenue is expected to approach zl.15 billion.

According to ING Investment Management, 2011 promises to be another good year for the Polish stock market, though this will largely depend on how the situation develops abroad.

“In our baseline scenario, the WSE’s WIG index could be realistically expected to hit 55,000 points at the end of 2011, which would mean an increase by a dozen or so percent,” said Bombol. “We are anticipating considerable corrections along the way, together with increased fluctuations on the market. As for individual market segments, we believe that small and medium-sized enterprises will flourish. The Polish economy is gathering speed and SMEs are the main beneficiaries of economic growth. Although large companies making up the WIG20 blue-chip index may prevail for a part of 2011, investors might want to consider building positions in the SME sector.”

Analysts from investment fund company Skarbiec TFI SA also expect positive trends on the stock market. “Our forecasts for 2011 show that the Warsaw Stock Exchange’s indexes will grow 15 percent on average, with medium-sized companies gaining the most,” said Bogusław Grabowski, chairman of the board at Skarbiec TFI.

Foreign investors have welcomed the stability of the Polish economy and its prospects for further growth. The Economy Ministry estimates that foreign direct investment in Poland in 2010 approached 10 billion euros and is likely to continue at a similar level in 2011.

Polish businesspeople are also optimistic about 2011. According to a market sentiment survey coordinated by the Polish Chamber of Commerce (KIG) as part of the European Economic Survey project, 66.7 percent of businesses surveyed expect to boost their sales in 2011 and only 10 percent expect a slump. Mood in industry is more optimistic than in the service sector.

Overall, Poland comes in third in the survey in Europe, behind Sweden and Estonia. Last year, 58.8 percent of the businesses polled in Poland expected their sales to grow, while 11.9 percent believed their sales would decline.

“What seems to be the main reason behind the improving mood is a consistent increase in both domestic and foreign demand, although the situation remains uncertain in sectors such as construction and transportation,” said Marek Kłoczko, secretary-general of the Polish Chamber of Commerce.

The report shows that 63.1 percent of businesses expect an increase in domestic sales and 10.4 percent expect their sales to drop.

The survey also points to a revival in the investment plans of businesses. Almost 47 percent of the businesses surveyed plan to increase investment in 2011; 40.1 percent want to keep it unchanged; and 13.2 percent plan to reduce investment.

According to the survey, unemployment should decrease in 2011, with 35.1 percent of the businesses polled planning to expand their work forces, and 15 percent opting for staff reductions. Almost 50 percent of businesses declare that their current employment level will remain unchanged.

Those surveyed are less optimistic about the business environment: 27.7 percent of respondents said that the business environment will improve, 28.7 percent expect it to worsen, and 43.6 percent expect no change in this area.

Andrzej Ratajczyk
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