Clouds gather over Poland's economy

By bne IntelliNews October 3, 2014

Jan Cienski in Warsaw -

 

Adam Krzanowski lives in Krakow, but he is being directly affected by the Ukrainian-Russian conflict 1,500 kilometres to the east.

The co-founder of Nowy Styl, one of Europe's largest office furniture makers, he set up a Ukrainian subsidiary together with local partners operating a large factory in Kharkiv producing largely for the fast-growing Russian market. “There is a double digit drop in sales in Ukraine – about 30%,” he complains. “The Russian economy is also starting to sag.”

Krzanowski's troubles are one sign that the atmosphere around the Polish economy is becoming a lot more troubled.

The prediction is for growth of 2.9% this year and 3.1% in 2015 according to Eurostat, the EU's statistical agency. That compares to a lacklustre 1.6% eked out last year, when the economy appeared to be in danger of falling into its first recession in two decades. But those predictions are now being called into question by a more hostile economic climate.

Squeezed

To the east, there is war and economic slowdown being battled by people like Krzanowski, and by Polish exporters hit by Russian sanctions.

To the west, the Eurozone seems to be unable to restart higher growth, part of a dismal record in Western Europe that has the region performing more poorly than it did during the Great Depression of the 1930s. Second-quarter growth showed small contractions in Germany (Poland's largest export market accounting for a quarter of exports and 10% of GDP) and Italy, while France remained flat.

“The external environment will remain challenging in the coming months, with spillover from the Russia-Ukraine standoff and weak growth in the eurozone representing a downside risk,” notes a new report by Standard & Poor's, the rating agency.

Finally, the US Federal Reserve is likely to start increasing interest rates next year, potentially causing problems for emerging markets like Poland, which are dependent on external capital flows.

Poland also faces domestic uncertainty. Donald Tusk, who headed the Polish government since 2007, is leaving Warsaw to take the EU's top job of president of the European Council. His successor, Ewa Kopacz, has to seize control of her fractious Civic Platform party and lead it into next year's parliamentary election, trying for the party's third victory in a row.

Although growth in the first two quarters was still relatively strong, coming in at an annual 3.4% and 3.3% respectively, the outlook is worsening. In its analysis, Erste Bank predicts expansion will slow through the second half of this year and the only growth driver will be Poland's large domestic market. “The fragility of the Eurozone recovery and aftermath of the Ukraine crisis poses some downward risks to next year’s economic outlook,” the bank said, dropping its forecast for growth in 2015 to 3.0% from an earlier 3.5%.

However, even a glummer outlook for this year and for 2015 still leaves Poland as one of the fastest growing economies in the EU (although that low bar for success stands as a condemnation of the EU's inability to kick-start a vibrant expansion).

Sunshine through the clouds

There is some additional help on the horizon.

The country has seen inflation turn into deflation, and the expectation is that the central bank's rate-setting Monetary Policy Council will cut the already record low benchmark of 2.5%. Erste predicts a total cut of 75 basis points by the end of 2014.

Kopacz is also scrambling to cement her popularity before the 2015 parliamentary vote. In her maiden speech to parliament on October 1, she promised to slash the red tape that has been a perennial complaint of Polish business, as well as to make the tax system more comprehensible, in measures aimed at reducing structural impediments to growth.

Although Poland has been rising in the ranks of the World Bank's "Doing Business" survey (it does slightly better than its regional peers), it still has a long way to go to match Europe's most competitive economies. One measure that could improve Poland's standing is Kopacz's promise to improve procedures for construction permits, one area where Poland has one of the worst performance metrics in the world.

The need for such steps can be seen by Poland's growth statistics. Since joining the EU in 2004, Poland has averaged annual growth of 4.1%, but the results in the last few years are well below that average. “While the Polish economy has recovered from the slowdown in 2012 and 2013, its middling real performance in [the second quarter] points to an unsettled recovery and a deteriorating business sentiment across neighbouring EU countries more generally,” says Marco Zaninelli, assistant vice president of Moody’s, in a new report from the rating agency.

While Kopacz and the central bank's interest rates are important, Poland's resilience really depends on people like Krzanowski.

Nowy Styl recently bought a second smaller German competitor, which helps it compete in markets where a “Made in Germany” label does much more for sales than a “Made in Poland” one. The company is also building a factory in Russia, avoiding Ukrainian-Russian border troubles and the potential impact of more sanctions against Russia. “We are selling much less to Russia, but you simply have to roll up your sleeves and work,” says Krzanowski.

 

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