Transcript Poland has not been in recession since the early 1990`s

Is Poland entering a recession?
November 2012
Michał Dybuła
Chief Economist Central & Eastern Europe
What is recession?
 The
common definition refers to recesssion as two successive quarters of GDP
decline in q/q terms;
 Poland
has not been in recession since the post-transition crisis in the early 1990’s;
 More
recently GDP was falling in q/q terms in 2000, 2001, 2002 and 2008, but the
declines lasted each time only one quarter and were immediately followed by
economic growth;
 The
current slowdown may eventually involve a shallow and short-lived recession in
the second half of 2012;
 Foreign
trade will continue adding to GDP in the coming quarters;
 However,
the domestic economy (investment and consumption) will be contracting
from Q2 2012 to early 2013, so the „crisis feeling” may be actually quite strong;
 GDP
has never fallen in Poland in annual terms since 1991 and we do not expect a
contraction this time, as well.
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Poland has not been in recession since the early 1990’s
Source: Reuters Ecowin Pro, BNP Paribas
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Poland: Recession could be now
Source: Reuters Ecowin Pro, BNP Paribas
 Activity
data are consistent with major weakness in the economy in Q3 2012;
 GDP
growth has fallen to around 1.5% y/y in Q3, while leading indices point to
further slowdown to less than 1.0% y/y in the final quarter of the year;
 Such
picture is consistent with two quarters of shallow GDP decline (of aproximately
0.1% q/q) in both Q3 and Q4, i.e. a technical recession;
 Our
forecast assumes the economy bottoming out in the first or second quarter of
2013 with the subsequent recovery being driven by exports.
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Poland: What drives the current weakness of the economy?
Source: Reuters Ecowin Pro, BNP Paribas
 There
are two main sources for the current slowdown in the economy:
1.Falling external demand, which bodes poorly for the near-term export outlook;
and
2.Falling government spending (mostly investment spending due to less EU funds
at disposal).
 The
second factor is more important, as it drives the slump in construction, worsens
the outlook for the labour market and suggests that the weakness in the domestic
economy will prevail for some time.
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Poland: Latest data have been very poor
Source: Reuters Ecowin Pro, BNP Paribas
 The
latest data (for September 2012) have been extremely poor:
 Industrial production fell by 5.2% y/y – due to falling domestic and external
demand;
 Construction output contracted by 17.8% y/y (!!!) – mostly on the fall in government
infrastructure spending;
 Real retail sales declined by 0.4% y/y – on falling real disposable income;
 The unemployment rate has risen to 12.5% - annual rise in the number of
unemployed was 128.3 thousand.
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Poland: Weakness in activity feeding into the labour market
Source: Reuters Ecowin Pro, BNP Paribas
 Sharply
 We
slowing activity is reducing demand for labour;
expect employment to start falling in H2 2012 and to extend the fall in 2013;
 Rising
undemployment to above 14% on average next year will reduce the
bargaining power of employees;
 In
consequence nominal wage growth will remain very weak, probaly not exceeding
2.5% y/y in 2013 (after as expected 3,8% in 2012);
 As
inflation will fall even faster, real wages will start rising from Q2 2013.
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Poland: When does the slump end?
Source: Reuters Ecowin Pro, BNP Paribas
 Leading
indicators point to more weakness in the near-term, but our forecast for the
eurozone assumes a gradual pick-up in activity by Q2 2013;
 Stronger
external demand (Germany will rebound by mid-2013) will support the
recovery of Polish exports;
 This
will allow for a rebound in corporate investment in the second half of next year
and gradually improve the labour market outlook;
 We
expect a broad-based recovery by early 2014 and a period of above-trend growth
later on (GDP should accelerate to 3.0-3.5% y/y in 2014 on average).
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Eurozone recovery by mid-2013
Source: Reuters Ecowin Pro, BNP Paribas
 The
reduction in risk premia across the eurozone - thanks to ECB action, i.e.
announcement of a new bond buying scheme (OMT), as well ESM becoming
operational – has drove the average long-term bond yield lower;
 This
is consistent with stronger growth in Europe from mid-2013 onwards;
 The
recovery in the global cycle, we forecast next year (in response to QE in the US
and policy easign in China) will support the German economy;
 This
is important since Germany is Poland’s main trading partner.
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Lower commodity prices (especially oil) will support the recovery as well
Source: Reuters Ecowin Pro, BNP Paribas
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Poland: Policy-mix – What is needed?
Source: Reuters Ecowin Pro, BNP Paribas
 Since
public debt is close to 55% of GDP (according to local rules), there is no scope
for discretionary fiscal loosening;
 The
government is likely to support the economy with State Treasury guarantess,
which however are unlikely to offset the fall in public investments;
 In
order to support a faster recovery, monetary policy should be softened;
inflation points to bold interest rate cuts ahead – the NBP policy rate will be
reduced to 3.00% by mid-2013, we think
 Falling
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Poland: How will the zloty trade in this environment?
Source: Reuters Ecowin Pro, BNP Paribas
 Weaker
growth and lower short-term interest rates are consistent with weaker zloty
exchange rate;
 However,
since the start of the year, strong foreign bond flows have been supporting
the zloty. We expect foreign inflows to remain strong, preventing a too bold zloty
depreciation in 2013;
 We
forecast EUR/PLN at 4.25 by end 2012, rising to 4.30 in Q1 2013. The growth
recovery from mid-2013 will support gradual zloty appreciation with EUR/PLN falling
to 4.10 by end of 2013.
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Poland: Strengths & Vulnerabilities
 Poland
is well prepared to face a period of weaker growth in 2012-13;
 Fiscal
policy remains prudent, which is reflected by low risk premia and spreads on
Polish bonds; tightening measures in 2011-13 will create sufficient space to pre- and
co-finance EU strictural funds in the new financial agenda (2014-2020);
 External
imbalances have been narrowing; International Reserves cover more than
fully outstanding short-term external debt; the Flexible Credit Line with the IMF
provides for an additional safety net;
 The
economy is well diversified: it does not depend excessively on domestic
consumption or exports; it also does not depend on one particular sector (like car
manufacturing or construction);
 The
economy is highly competitive; unit labour costs in manufacturing have declined
the most compared to regional peers, primarily thanks to strong productivity gains
(see Chart on next page);
 The
banking sector is well capitalised and its liquidity is strong;
 The
above factors suggest that economic growth should recover relatively quickly
once the cyclical backdrop improves.
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Poland: The most competitve economy in the region
Source: OECD, Reuters Ecowin Pro, BNP Paribas
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