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The Warsaw Voice » Business » December 21, 2011
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Economy Expected to Slow
December 21, 2011   
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Most analysts predict that the Polish economy will grow at a slower rate in 2012 than in the previous two years, though much faster than the European Union economy as a whole.

In its latest forecast, the European Commission put Poland’s 2012 economic growth rate at 2.5 percent instead of the 3.7 percent projected earlier. The Polish government has adopted the same target in its recently revised budget bill. This would represent a major slowdown from the 2011 growth rate, which is expected to be around 4 percent.

However, other European economies are expected to grow at a slower pace. The European Commission projects that the EU economy will expand by 1.6 percent in 2011 and only 0.6 percent in 2012. Lithuania is expected to have the highest growth rate of 3.4 percent in 2012, followed by Estonia with 3.2 percent, and Poland and Latvia each with 2.5 percent.

According to economic projections for Poland published by the European Commission in November, after the slowdown in 2012, Poland’s economic growth will accelerate to 2.8 percent in 2013.

The country’s average annual inflation rate is expected to be 3.7 percent in 2011 and 2.7 percent in 2012, less than predicted in May. The Polish unemployment rate, calculated according to a method used by the European statistics office, Eurostat, is expected to stand at 10 percent in 2011, followed by 10.1 percent in 2012 and 10 percent in 2013, which means at slightly higher levels than projected in May. To justify the downward revision of its projections for Poland, the Commission wrote that the global slowdown will determine the prospects for the Polish economy and that business activity will most likely suffer as a result of economic uncertainty in 2012, while a slight improvement may only be expected in 2013.

Analysts at ING Investment Management also predict an economic slowdown in Poland due to the overall global trends and the risk of recession in Europe. “We are closely monitoring the Purchasing Managers Index (PMI) for Poland; it has moved dangerously close to the 50-point barrier,” said Michał Kopiczyński, director of the Equity Instruments Management Team at ING Investment Management. “Luckily, consumer demand remains stable and private investment should stay at a level similar to that in 2011.”

Poland will not be able to avoid a slowdown in 2012, but its GDP growth rate will stand out favorably compared with other European economies, according to ING Investment Management.

Poland’s GDP growth should hover around 3 percent in year-on-year terms. “We have revised downward our projection for growth in corporate profit from 34 percent to 25 percent in 2011 due to uncertainty about the further development of the economic situation,” said Kopiczyński. “I think we already have a slowdown, though not a recession, in equity prices. The fact that at least some valuations are at attractive levels is confirmed by numerous buyback transactions carried out by companies and managerial staff, which means people who are the closest to their businesses.”

ING Investment Management says that the bearish trend on Poland’s equity market has been too sharp and too rapid so share prices may rebound in the short term. But in the longer term, investors will remain cautious about the equity market; in fact, there is a constant risk that investor sentiment will deteriorate further. Krzysztof Kożuchowski, director of the Debt Instruments Team at ING Investment Management, said, “After the correction, the debt market has potential for growth. However, a lot will depend on foreign investors because the latest bullish sentiment on the Polish bond market has been moderated by greater risk aversion.”

Poland as a rapid-growth market
Professional services company Ernst & Young and research institute Oxford Economics are more optimistic about the prospects of the Polish economy. They have included Poland among 25 Rapid-Growth Markets, or countries that are expected to influence the shape of the global economy in the next decade. Countries with favorable forecasts for the next 10 years also include China, Russia, Qatar, the United Arab Emirates, Turkey, and Brazil.

Ernst & Young and Oxford Economics say Poland has strong ties with euro-zone countries and may feel the turbulence in the currency union. However, its strong fundamentals, including the scale and potential of the internal market and the stability of the financial sector, should help the country to maintain a higher-than-average rate of growth from 2011 to 2015.

“After a slight slowdown in 2012 the growth of the Polish economy should stabilize in the next few years at around 4 percent annually,” said Piotr Ciżkowicz, chief economist at Ernst & Young. “The main threat to Poland’s economic growth is the second wave of crisis in the euro-zone countries caused by fiscal problems. Slower economic growth in the countries which are Poland’s main trade partners will not only constrain external demand for Polish goods and services but will also worsen the investment climate among Polish businesses, something that will prevent the rebuilding of fixed and working assets, a process that started in the first half of 2011. This is the reason why internal private consumption is expected to be the main driver behind GDP growth in Poland in the coming years. At the same time, successful fiscal consolidation is necessary to maintain stable economic growth in Poland in the coming years.

Meanwhile, analysts at PBP Bank say that if euro-zone growth goes down to close to or below 0 percent in 2012, which is very probable, it will be difficult for Poland to keep its GDP growth at around 3 percent. A growth rate of 2 percent or less is more likely, PBP Bank says, which would mean a repetition of the 2009 scenario. “However, after the recent announcement of structural reforms by the government, we are more optimistic about medium- and long-term prospects for the Polish economy,” PBP Bank said in a report. “We do not rule out Poland being a ‘green island’—not necessarily in terms of GDP growth, but in terms of structural reforms, which have been lagging in Europe so far.”

The PBP Bank report notes that no Polish government since 1989 had more favorable conditions for reforming the country than the current government of Prime Minister Donald Tusk.

First, no elections will be held in the next three years. Second, the ruling Civic Platform (PO) party has a strong parliamentary base. Third, the specter of crisis weakens the influence of various interest groups, PBP Bank says. If the government stays on the reform path, Poland will be able to hope for a positive response from credit rating agencies. Moody’s and Fitch have already said the reform plan outlined by Prime Minister Tusk in his policy statement is a positive sign.

The PBP Bank report says that “there is a chance that one of the agencies will upgrade Poland’s rating outlook by the spring and the rating itself by the summer or autumn. But there is a sine qua non condition—Europe must not slide into a second great recession because in such a situation the crisis will strongly affect all countries, Poland included, undermining their credit worthiness.”

Waiting for investment revival
Tomasz Starus, director of the Risk Assessment Office and chief analyst at Euler Hermes in Poland, said, “I do not see conditions now for creating foundations for Poland’s long-term growth, which is mainly ensured by investment.”

According to Starus, Poland’s GDP growth is based on internal and external consumption, which is prone to fluctuation. The present situation is too uncertain for businesses to start investment projects and for banks to finance them. Investment processes usually take several years to complete, while the situation is now predictable within a time frame of several months. The usual uncertainty associated with changes in regulations, taxes and so on, something to which businesses in Poland have become accustomed, is now combined with a great external uncertainty, Starus says. He adds, “Who could have expected half a year ago that the first rescue program for Greece would fail, that investors would lose confidence in Italy or that agencies would threaten to downgrade France’s rating?”

It is necessary to be cautious when estimating the prospects of the Polish economy in 2012, Starus says. While the country’s GDP growth in the first quarter of 2012 may be projected at 3-3.5 percent, he says, forecasts for the following quarters are uncertain due to high volatility, especially on foreign markets.

At the moment, Polish businesses are benefiting from a strong euro, which supports Poland’s exports, Starus adds. However, the strong euro is pushing up fuel prices. Two or three years ago, fuel prices also rose sharply on international markets, but at the time they had less impact on Poland because the zloty was strong, Starus says.

Moreover, domestic demand is weakening, Starus notes, although in Western Europe this trend has been more pronounced. Fiscal changes announced by the government will jack up the costs of businesses—employers will have to pay higher disability contributions as part of the social insurance system.

Among the reasons why the Polish economy managed to withstand the previous wave of crisis was a large-scale relocation of manufacturing operations to Poland, either directly or in the form of orders. Now a similar trend is unlikely because the public mood is less favorable. Relocation has always been criticized but now we are dealing with “Occupy” movements, Starus says. What is more, industry is unprepared to make large investment outlays to relocate production to Poland, while cost-efficient solutions—such as placing orders with Polish suppliers, joint ventures, acquisitions and so on—have already been exploited. It is also clear that Poland’s lower costs, and consequently competitive product prices, are unable by themselves to generate demand for furniture, radio and TV equipment, household appliances and other goods. Output is now generally lower than planned so the payback period is longer, according to Starus.

“When the situation calms down, consumers will start receiving positive news from the market and from the state—excise and other taxes will tend to fall rather than rise,” Starus says. “As a result, consumers will start to spend more. Firms manufacturing goods of everyday use and other consumer goods will reach the limit of their production capacity and will start investing. They will place orders with firms carrying out investment projects. In this way, investment will be spreading, leading to a lasting economic revival.”

Businesses are also moderately optimistic. Almost 50 percent of business owners taking part in the Rzetelna Firma (Reliable Business) program, which promotes high ethical standards and best business practices, said their firms will invest more in 2012 than in 2011, despite the projected economic slowdown.

Less than 30 percent of those surveyed said they will be unable to spend as much money on business expansion in 2012 as in 2011. Almost a quarter of those surveyed said they have yet to decide how much to invest in 2012.

“The planned increases in investment spending indicate that business owners see the existing situation not as a threat but as an opportunity,” said Waldemar Sokołowski, chairman of Rzetelna Firma. “By increasing spending on business expansion and at the same time providing high-quality products and services, they will be able to build stronger foundations for their businesses and emerge from the whole situation as more credible business partners.”
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