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bne July 2017 Special focus I 35
The PiS government’s Family 500+ child benefit scheme has helped buoy household spending, while a labour market that has been tightening over the last three years or so has boosted con- sumer confidence. In other words, more jobs, higher wages and state benefits sent Poles flocking to the shops last year.
It’s a trend that persisted in January- March, but contrary to 2016, industry and investment are also doing their bit this year. PiS won’t want to shout about it, but the EU plays a central role in the revival.
Activity and confidence is robust
in the Eurozone, which provides
the bulk of export demand for the relatively small and open economies in Visegrad. That has Polish industry driving hard; the sector’s output rose 7.1% y/y in the first quarter of 2017, compared with just 1.3% growth in the final three months of 2016.
However, it is EU structural funds
that could start to help most this year. Beset by a poor track record in absorp- tion, Poland and its regional peers raced in 2015 to claim the last cash under Brussels’ 2007-14 budget. That left
the country with few approved public projects last year, a situation some claim
Private fixed investment is harder
to gauge however. PiS has made confrontation with the EU a cornerstone of its domestic political support. With Brussels’ confidence rebounding following the French election, the
tussle is likely to keep political risk
in the international headlines.
More directly, policymaking in War- saw remains erratic. The government will be tempted to seek new revenue generating schemes should economic momentum fade.
An effort to introduce a progressive tax on large retailers was overturned by the EU last year, for instance. There is speculation that the plan to grab some cash from the country’s busy shops has not been abandoned altogether.
“Political risk will be a problem at least for the medium term,” admits Carson. But with growth so strong, investors should remain bullish. “Inflows have really picked up on capital markets. The zloty has risen strongly and the stock market is gaining.”
However, in the longer term, the analyst suggests political risk is likely to become more of an issue. A potential flashpoint would be if the budget deficit crosses the
Carson, whose prediction sat at the upper end of the range at 3.5% at the start of the year, suggests 4% GDP growth now “doesn’t seem unreasonable”. At BZWBK and other Polish banks, revised forecasts are already under consideration.
Katarzyna Rzentarzewska at Erste says the pace of GDP growth in the first quar- ter “makes us revise the FY2017 GDP growth forecast from 3.3% to 3.8%”. However, a cautionary note soon arrived. While still suggesting healthy growth, industrial, construction and retail sales data for April showed activity was well below the surging numbers in March.
“The April data remind us that there are perils to extrapolating such
a powerful trend too far into the future,” warned analysts at Com- merzbank. “Polish growth could still remain healthy, but the acceleration of Q1 may not repeat. Retail sales data also send out the same message.”
Several other hints have followed. April data also suggested weakening wage growth and job offers, and PPI infla- tion moderated by more than expected, pointing to a lack of demand-powered inflationary pressure. The following month, business sentiment dropped for the first time in 2017.
At the same time, accounting issues look to have exaggerated the first quarter GDP data. Statistics office GUS recently reduced its reading for the first quarter of 2016, which created a low base to boost the year-on-year result. However, the readings for the remaining quarters of last year were raised, suggesting an oppo- site effect through the rest of the year.
“The growth dynamics are likely to
ease in the coming quarters,” points out Rzentarzewska. The Monetary Policy Council noted that it expects the pace
of GDP growth to fade through the rest of the year, as it announced on May 17 that it sees no development in the econ- omy that would justify a rate hike for the record low 1.5% benchmark.
“Given Poland’s economic openness, the main risk to the outlook is weaker-than-
“Weaker predictability of fiscal policy since the 2015 election creates another risk”
was antagonised by widescale person- nel changes within the civil service as PiS took over the reins. Fixed invest- ment nosedived 5.5% y/y in 2016.
The signs are that Poland is finally getting absorption on track again. The best indicator is the construction sector. The lack of EU projects last year saw the industry slump, but between January and March output boomed 17.2%. “Construction and investment have tended to move together. We expect investment to remain strong through the year,” says Liam Carson at Capital Economics. “It could easily add 1pp to the headline.”
EU’s 3% threshold, as many expect in the next three years or so.
For this year, the consensus is that Poland should just squeeze under the cap, but that crucially assumes growth remains on target. The first quarter data has analysts rushing to raise their forecasts for economic growth this year. But will it last?
Louis says Fitch expects GDP growth will accelerate to 3% in 2017 and 3.2% in 2018. However, he adds, “we might also take the opportunity to review our GDP growth forecasts” during a review of the ratings of the sovereign on July 7.
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