Timothy Ash of RBS -
On Friday, May 29 the Central Statistical Office (CSO) reported national accounts data for the first quarter that showed real growth of 0.8% on year. This was slightly below the consensus and down from the 2.9% real GDP growth posted the fourth quarter of 2008, but nevertheless the fact that growth remained in the black is a notable achievement, marking Poland out as only the second economy in the EU27 to actually post positive real GDP growth in the first quarter; Greece is the only other, recording growth of 0.3% on year. The performance adds a modicum of credibility to official government claims that for the full year in 2009 Poland can keep growth in positive territory, albeit only in the 0-1% range and still significantly down on the approx. 6% growth trend over the period 2002-2008.
During our recent country trip to Poland, a major topic for discussion was why the Polish economy is proving so resilient relative to its peers, which more or less across the board have seen 3-7% on-year contractions in the first quarter, with the Baltic states experiencing a much sharper 12-17% on-year contraction. Our conclusions from the country trip are worth repeating with respect to Poland's resilience on the growth front:
(+) It is a much less export oriented economy, which is more diversified and less dependent on single industry (eg. autos in the Czech Republic/Slovakia), commodities (Russia/Ukraine), or indeed a single company than are some of its regional peers. Hence it seems more insulated against the global collapse in exports, post the failure of Lehman.
(+) Poland has a larger base of SMEs, which seem more durable than larger, often multinational conglomerates - perhaps they are more committed to the domestic economy/employment and more responsive to meeting the needs of the local market;
(+) The Polish car industry, and indeed the related industries, seems to have benefited from cross-border purchases associated with Germany's "cash for bangers" programme - perhaps evident in the marked easing back in the drop in industrial sales in March to minus 2%, from minus 14-15% for the first two months of the year;
(+) The fact that Polish firms have tended to concentrate on producing cheaper product ranges, eg. for autos, also perhaps provides a degree of insulation in a global recessionary environment where consumers are looking to cut back costs and trade down to less expensive models;
(+) Poland's floating exchange rate regime, which has allowed a significant nominal and real depreciation of the currency, has perhaps acted to provide a more positive contrition from net exports;
(+) Domestic demand, particularly private consumption is also assumed to provide a bigger underpinning to growth; the share of private consumption in GDP is much higher in Poland than in some of its regional peers. Real wage growth/retail sales have both remained relatively resilient - with retail sales posting only modest on-year declines in the first quarter, and nominal wage growth sustaining at 6.8% on year in the quarter (suggestive of real wage growth of around 3%). There may also be a case of worker remittances providing a degree of insulation herein.
(+) While unemployment is rising, it seems to be increasing at a much slower pace than in some of Poland's peers, eg. Russia and Turkey, and at just over 11% is still significantly lower than rates of 20%-plus recorded in the late 1990s. Following a number of years when skilled labour was in relatively scarce supply, as the economy slows Polish companies appear reluctant to shed labour, and are instead looking to retain skilled labour. Labour retention, and durability in real wages for skilled workers again acts to underpin domestic demand;
(+) Perhaps Poland's relatively large agro-industrial sector also provides a degree of insulation, especially given the relative buoyancy of soft commodity prices in recent months.
(+) Poland did not experience the huge growth in private sector credit growth that drove real GDP growth in other countries in the region over much of the past decade. With much lower levels of foreign capital inflow, domestic asset prices, particularly housing, were not as inflated as elsewhere in the region. The subsequent correction in assets prices, and tightening in credit conditions, has hence not been as deflationary to the economy as elsewhere in the region.
(+) Fiscal policy is acting as an automatic stabiliser, with recent hikes in public sector salaries, pensions and benefits providing a buffer for private consumption.
(+) Capital investment is likely to be underpinned by large infrastructure projects undertaken by the public sector, eg. with the use of EU structural funds, but also by continued strength in private sector fixed capital investment, helped by still hefty retained profits from previous years of high growth/profitability.
Reviewing the breakdown of GDP growth for the first quarter by expenditure it is notable that:
* Private consumption did slow, easing back to 3.3% growth on year, from 5.3% growth in the fourth quarter of 2008, but still remained significantly in position territory showing the resilience of consumers in Poland;
* Government consumption still managed to increase by 6.1% on year, which was down from the remarkable 14.1% year-on-year growth in the fourth quarter (perhaps explaining some of the resilience in private consumption in the first), but above the 5.1% growth posted in the first quarter of 2008. EC forecasts, meanwhile suggest that the general budget deficit in Poland could rise to reach 6.6% of GDP in 2009 and 7.3% of GDP in 2010, above its peers (both Czech Republic and Hungary).
* Fixed capital investment still managed to post 1.2% on-year growth, albeit gross capital formation did fall by 23.8% on year, showing evidence of destocking on a large scale.
* Net exports providing a significant boost to growth, with the drop in exports minus 17.6% on year being outpaced by the 17.6% on-year drop in imports, with domestic demand contracting by around 1% on year.
The composition of growth does tend to back the assertions above in terms of Poland's relative resilience, albeit given steep recession being experienced by Poland's main trading partners, alongside expectations of only a weak recovery, maintaining growth in positive territory for the full year in 2009 will still prove very challenging. Indeed, industrial output data for April (minus 12.4% versus just minus 2.4% in March) suggests that the economy will still be significantly impacted. We would hence still retain out assumption of negative growth in 2009 of 0-2%, which would still tend to play into a further rate easing story for this year at least.
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