Swedbank Baltic Sea Analysis No. 32/2012


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Swedbank Baltic Sea Analysis No. 32/2012

  1. 1. Swedbank Baltic Sea Analysis No. 32  28 May 2012 Poland Europe’s ‘growth star’ is losing luminosity – but remains among the region’s strongest economies  After Poland’s GDP growth reached 4.3% last year, we anticipate a slowdown to 2.7% this year and 3.2% next year. Weaker exports, lower investments and rising un- employment are squeezing domestic demand.  The crisis in the euro zone is making it easier for the go- vernment to delay EMU accession. Although it says the convergence criteria will be met by 2015, it is unlikely that the zloty will be pegged to the euro in ERM2 in 2013.  The crisis in the euro zone could reduce growth and com- plicate the budget consolidation. Additional measures are needed to reduce the structural deficit to 0,5% of GDP by 2015. To remain competitive in the long term, Poland must increase value-added in its manufacturing through increased investment in innovation, new technology, education and infrastructure. Increasing participation in the labor market should also be high on the reform agenda. Several reasons to talk about Poland On January 1 Poland handed over the EU Presidency to Denmark Poland’s after a hectic fall. On the one hand Poland flaunted the fact that it self confidence survived the global recession and financial crisis better than many has grown other countries. On the other hand, being outside the euro has madeEconomic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46 (0)8-5859 7740e-mail: ek.sekr@swedbank.com Internet: www.swedbank.com Responsible publisher: Cecilia Hermansson +46 (0)8-5859 7720.Magnus Alvesson +46 (0)8-5859 3341, Jörgen Kennemar +46 (0)8-5859 7730 ISSN 1103-4897
  2. 2. it difficult for Poland to lead the region with all its problems. The eurozone’s crisis at the same time has allowed Poland to delaymembership, though it is keeping the process alive by using thecoming years to meet the convergence criteria. Instead of focusing onwhether it qualifies for the EMU, Poland is now asking what the eurozone has to do to convince it to join. Self-confidence is high andunderstanding of the country’s importance has grown.Outgoing Chinese Prime Minister Wen Jiabao recently visited Poland,which China still sees as one of the countries that offer a pathway toEastern and Central Europe. There are huge investment needs here,but also a strong domestic market that has kept the economychurning despite global uncertainty. Now the risks are growing for thePolish economy as well, with conditions weakening, though theoutlook remains fairly good.The economy is slowing – but growth remains decentThere are several reasons why Poland’s economy didn’t shrink during A mix of factorsthe 2008-2009 crisis, as many other countries did. When the global explains Poland’scrisis began, fiscal policy was loosened, which kept households in a ability to withstandspending mood. The floating currency, the zloty, fell substantially and the crisisprovided support for the export industry. A flexible labor market, lowdebt levels and a relatively stable financial sector also helped to keepgrowth on the plus side. Moreover, subsidies from the EU’s structuralfunds were important factor in keeping investment alive.It is also important that Poland’s economy is less export-dependentthan many other smaller EU countries. The export sector is lessfocused on input and investment goods, and agriculture is stillimportant. Nearly 13% of the labor force is in the latter sector, whichaccounts for only about 3.5% of GDP. As a result, Poland’s exportsaren’t as vulnerable to fluctuations as Swedens or Finland’s.Poland’s GDP based on the supply balance’s various components(annual change, %) 2 Swedbank Baltic Sea Analysis No. 32 • 28 May 2012
  3. 3. GDP grew last year…Poland’s GDP grew by 4.3% last year (against 3.9% in 2010 and 1.6%in 2009). In the fourth quarter of 2011 the economy grew by 4.4% atan annual rate and 1.1% on a quarterly basis. In other words, thePolish economy continues to perform strongly. Householdconsumption rose by 3.1% and investments by 8.3% at an annualrate. High investment growth is partly due to this summers Europeanfootball championship, which is being co-hosted with Ukraine. Majorinvestments in the public sector are also being financed with the helpof the EU’s structural funds.We expect GDP growth to decelerate to 2.7% this year and 3.2% next … but now theyear. This is a total of 0.5 percentage points lower than in our Baltic economy is slowingSea Region Analysis in October 2011. Several factors suggest that slightlythe economy is slowing. Global demand is falling, which is impactingPolish exports. After the European football championship, the rate ofinvestment will decline. Fiscal policy is being tightened.Unemployment is rising and inflation is relatively high, which isdampening the mood of households. Surveys point to slightly lowerfuture confidence and declining consumption and investment. Inmanufacturing, the purchasing managers index indicates a slowdownwith fewer new orders.Confidence in the economy (index) and in manufacturing, according to thepurchasing managers index (PMI) and the index for new orders Poland’s competitiveness – despite success, morestructural reforms are neededIn the 2000’s Poland gained share in the global export market, like Poland gained marketmany other Eastern and Central European countries, while Western share in the 2000’sEurope lost ground. In 2010 the trend was broken and Poland’s with the exception ofmarket share dipped, though it is too early to say whether this was 2010the start of a downward trend.Swedbank Baltic Sea Analysis No. 32 • 28 May 2012 3
  4. 4. Market share, index 2000 = 100 200 180 CZ 160 DE 140 120 PL 100 SK 80 LV 60 SE 40 FIDuring the global financial crisis and recession production fellsignificantly in countries such as Germany and Sweden, while thelabor force shrunk slightly. Unit labor costs rose. In Poland productiondidn’t drop to the same degree, productivity rose and costs per unitproduced continued to improve.Unit labor costs, index 2005 = 100 Poland Germany Sweden 150 140 130 120 110 100 90 80Although the industrial sector has remained competitive, the Polish Poland has to increaseeconomy still faces structural problems that threaten its long-term participation in thedevelopment. The employment rate, i.e., the percentage of the labor marketworking-age population that is employed, is only 66%. Unemploymenthas risen and since November has topped 10%, according toEurostat, rising to 12.9% in April, according to national data.There are significant regional differences, however, withunemployment relatively low in the capital and industrial areas to thesouth, but higher in the eastern and northeastern sections of thecountry. This is also evident in regional income differentials, with GDP4 Swedbank Baltic Sea Analysis No. 32 • 28 May 2012
  5. 5. per capita reaching slightly over 56 000 zloty per year in Mazowieckie,which includes the Warsaw area, but below 24 000 zloty inLubeleskie to the east, according to the Polish bureau of statistics.Furthermore, differences are increasing between generations, withyouth unemployment having risen to nearly 27%, exceeding the EUaverage of about 23%. According to the ILO, the number of youngpeople working temporary jobs has increased more than in any othercountry in the 2000’s.Unemployment and inflation (as well as core inflation excluding food andenergy prices) At the same time there is a growing mismatch in the Polish labor More companies aremarket. Industrial and service companies are having a harder time having difficulty findingfinding skilled workers, while unemployment is rising. Focusing more skilled workers, at theon innovation, education and research should be high on the reform same time thatagenda if Poland is going to remain attractive as it loses its low-cost unemployment is risingstatus.China’s Prime Minister, Wen Jiabao, visited Poland in April, the first China and Poland planvisit by a Chinese prime minister since 1987. China has committed to increase tradeUSD 10 billion in loans to stimulate investment in Eastern and CentralEurope, to be used for, among other things, infrastructure, technologyand a green transformation. In addition, a USD 500 million fund isbeing created for Chinese investment in the region. China’s goal is todouble trade with Eastern Europe to USD 100 billion within threeyears.Right now, however, trade relations are out of balance. While Polish Trade is out of balanceexports to China amounted to 1.3 billion euro, imports were nearly 10 – China’s exports aretimes higher. Poland has now started a program, “Go China,” to help 10 times as high asits companies do business in China. Trade is expected to grow in the Poland’sareas of food and chemicals in particular. There is plenty of room formistakes along the way, however, and Poland’s many small andmedium-sized companies face considerable challenges. ChinaSwedbank Baltic Sea Analysis No. 32 • 28 May 2012 5
  6. 6. certainly sees Poland as a gateway to Europe with its large market,low labor costs, significant need for investment and decent growth.Being able to test its consumer products in the Polish market isanother advantage for China.Poland leans on its own monetary policy – euroaccession will waitThe Polish export sector received plenty of help in fall 2008 from a During the crisis aweaker zloty, in combination with lower interest rates, which also lower zloty supportedgave a boost to the domestic economy and financial sector. The zloty exports – now thefell by just over 50% against the euro at its low point between August currency is again2008 and February 2009. It then rose until last years turbulent fallingsummer, when a flight to safety led to its appreciation and forced thecentral bank to intervene. After rising since the beginning of the year,renewed concerns in the euro zone are pushing the zloty lower, whichmay seem paradoxical since the Polish economy isn’t a source ofconcern. On the contrary, Polands macroeconomic development isstrong and the central bank has raised interest rates. The reasoninstead is that risk aversion has increased, which is affecting theappetite for emerging market currencies.Currency and interest rate trends On May 9 the Polish central bank surprised the market by raising its The rate hike in Maybenchmark rate by 0.25 bp to 4.75% when it felt that it had to curb was questionable – ainflation, which had risen to 4.1% in April, with even higher weaker economyexpectations going forward. Of course, the central bank might want to will reduce inflationexcuse the fact that inflation has stayed above the target rate of 2.5%+/- 1pp for as long as 16 months, since it is mainly due to highercommodity prices, increases in certain publicly set prices and theearlier depreciation of the zloty. Underlying inflation is estimated at2.7%. Now that economic growth is slowing due to weaker globaldevelopment, higher unemployment, tighter fiscal policy and weakerconfidence, inflation should gradually ease later this year. Though the6 Swedbank Baltic Sea Analysis No. 32 • 28 May 2012
  7. 7. zloty is weakening again, it probably won’t drop as far as late 2008,and more expansive monetary policy will probably be needed to avoidtoo much of a slowdown in the domestic economy.The euro crisis has made it easier for the government to delay joining The euro crisis isthe euro zone beyond 2015, as previously planned. Now it is saying delaying Poland’sthat it will meet the convergence criteria by 2015, but that Poland isnt entry into EMU as welllikely to peg the zloty to the euro within ERM2 as early as 2013, as ERM2which it would have to do to meet the criteria.Prime Minister Donald Tusk has expressed his continued support for Though not a member,eventually adopting the euro as an EU member, but has also said Poland wants a say inthat it wont be possible until the currency union’s rules are followed the euro zone’sby every member country. Poland’s desire to influence policy in the economic policieseuro zone despite not being a member was on display when the newfiscal pact was agreed on. Only by taking part once a year in the eurozone’s meetings would Poland be able to join the pact. Unlike smallerEU countries which will eventually join, Poland, with a population ofaround 38 million, feels it should have an influence right away. To agrowing extent Poland is asking what the euro zone should be doingto encourage it to join rather than whether Poland will meet theconvergence criteria.Fiscal policy – more to be donePoland has a rule stipulating that if the national debt exceeds 55% of Dangerously close toGDP, it must be slashed in the following year’s budget. In 2010 the the debt ceiling anddeficit reached 7.8% at the same time that government debt edged Poland has raised itsdangerously close to the 55% limit, at 54.9% according to the consolidation aimsMaastricht definition and 52.8% according to the national definition. Itwas obvious that Poland had to tighten its fiscal policy to meet theEU’s excessive deficit procedure (EDP) and the Maastricht deficit limitof 3% of GDP as well as its own national debt requirements. The goalwas to reduce the budget deficit to 5.6% in 2011, 2.9% in 2012 and2.5% in 2013. In addition, there is the fiscal pact’s requirement to limitthe structural budget deficit to not more 0,5% of GDP by 2015. Giventhe upcoming parliamentary election, the target for 2013 may have tobe slightly more ambitious.At the same time the euro zone’s crisis is slowing Poland’s GDPgrowth, making it more difficult to reach the budget targets. It seemsthat last years deficit goal was met partly through VAT hikes, publicspending limits and distributions from state-owned enterprises. Thestrong growth contributed to higher corporate tax revenue. Anothermove was also to reduce transfers to the pension system’s secondpillar, which lies outside the budget, from 7.3% to 2.3% of grosswages and instead credit the corresponding amount to the pensionsystem’s first pillar, which is included in the budget.Changes in the pension system that were adopted by parliament in The decision to raiselate March raise the retirement age for both men and women to 67 the retirement age tofrom 65 for men and 60 for women. The new law will be implemented 67 is unpopular butgradually through 2040. Although it has already passed, members of necessarythe Solidarity trade union are still demonstrating. ConsideringPoland’s worsening demographics, such measures are necessary. Agenerous pension system for two million disabled Poles is also underSwedbank Baltic Sea Analysis No. 32 • 28 May 2012 7
  8. 8. review. Several fiscal reforms to increase supply in the labor market will benefit the economy and budget over the longer term. Advantage Poland – but nothing is permanent At this point Poland’s relative position is good despite the chances of an economic slowdown. The convergence with the rest of Europe is continuing and will mean higher growth and productivity, but also higher prices and costs. It is essential therefore that Poland remains competitive by attracting foreign investment that increases economic dynamism and by investing in skilled labor, new technology and infrastructure. There seems to be little likelihood at present that Poland will develop its own imbalances and bubbles, and the risks in the banking system have lessened now that Swiss franc loans are no longer as much of an issue. At the same time it is always important in the age of convergence for countries to be vigilant about imbalances. Diligence in creating strong institutions and fundamentals will be rewarded in time. Cecilia HermanssonEconomic Research DepartmentSE-105 34 Stockholm Swedbank Baltic Sea Analysis is published as a service to ourTelephone +46-08-5859 7740 customers. We believe that we have used reliable sources andek.sekr@swedbank.se methods in the preparation of the analyses reported in this publication.www.swedbank.se However, we cannot guarantee the accuracy or completeness of theLegally responsible publishers report and cannot be held responsible for any error or omission in theCecilia Hermansson, +46-8-5859 7720 underlying material or its use. Readers are encouraged to base anyMagnus Alvesson, +46-8-5859 3341 (investment) decisions on other material as well. Neither Swedbank norJörgen Kennemar, +46-8-5859 7730ISSN 1103-4897 its employees may be held responsible for losses or damages, direct or indirect, owing to any errors or omissions in Swedbank Baltic Sea Analysis. 8 Swedbank Baltic Sea Analysis No. 32 • 28 May 2012