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Prospects for the Polish economy Lars Rasmussen Analyst, New Europe Research Danske Research, Danske Bank + 45 45 12 85 34 (direct) + 45 20 55 27 98 (mobile) [email protected] www.danskebank.com/danskeresearch April 2008 Outlook for the Polish economy in coming three years • Wage growth has accelerated sharply over the last couple of years after a prolonged period of high economic growth. This has contributed to higher inflationary pressures and reduced competitiveness – see page 3 • First signs of a slow down is becoming visible in data, but Poland will in general weather the global credit storm, due its strong fundamentals. We however expect that growth has peaked in 2007, and that it under every circumstances will shift from fifth to fourth gear during 2008-2010 as private demand eases somewhat. We however do not expect any major downturns, but we see real GDP growth slowing from the current rates around 6% y/y to roughly 4.5%-5% y/y by year-end. Hereafter should GDP expansion stabilise around 5% y/y in 2009-2010 – see page 4 • A strong labour market continue to support private consumption, but tighter credit conditions, higher inflation and a peak in the property market should gradually begin to weigh on private consumption and hence growth – see page 5 . Investment growth, another key driver behind the economic expansion is getting close to a peak – construction activity is key – see page 6 • Polish exports continue to be driven by especially strong German growth. However the expected slowdown in the German economy will weigh on Polish exports – see page 7 • Inflation has breached the official 2½% (+-1%) target zone driven by strong wage growth, but primarily the surge in food and energy prices. We tough expect to see a peak in Q3 2008. Then inflation should start to decline below 3% y/y in the following quarters, if food and energy prices stabilise – see page 8. Slower economic growth should also limit inflationary pressures in the Polish economy. This could pave the way some monetary easing in 2009-2010, but do not expect to much, as the central bank has proven fairly hawkish • We could see further appreciation of the polish zloty in Q2-Q3 2008, as higher rates and yields attract speculative capital flows, and as the growth outlook in Poland looks fairly robust. Going in to 2009-2010 we believe that EUR/PLN will remain fairly stable – see page 9 and 10 2 Wage growth continue to accelerate 10.0 % y/ y, 1 2 mcma % y/ y, 1 2 mcma Nom. wages 10.0 5.0 5.0 Real wages 0.0 Real wages, productivity adjusted 0.0 -5.0 -5.0 -10.0 -10.0 -15.0 01 Real wages, productivity adjusted 02 03 04 05 06 percent Wage growth is now showing clear signs of picking up and should accelerate further in during the rest of the year due to a tighter labour market and rising food and energy prices percent • -15.0 07 The accelerating wage growth is beginning to pose a potential inflationary problem, and it will have a limiting effect on longer term growth prospects 900 EUR per month Hungary 800 W ages in manufacturing sector 700 Poland 600 Czech Rep. 500 400 Russia Estonia 300 Bulgaria 200 100 Ukraine 0 00 01 02 03 04 05 06 07 900 800 700 600 500 400 300 200 100 0 percent • percent .../ figurbibliotek/ Source: Reuters EcoW in 3 First signs of growth slowing? 12 % y/ y Industrial production smoothed 10 • But, the rising difference between GDP growth and industrial production indicates that net exports is contributing less to growth • Thus, deceleration in industrial production growth may show some moderate signs of slowing due to capacity constraints • We expect that the Polish GDP growth will continue to slow below 6.0% y/y in the coming quarters • Until now there have been very few signs of slowdown in the Polish economy, but is likely to change over the summer 10 8 6 6 << Real GDP 2 percent percent Growth remains very strong– primarily driven by strong investment growth % y/ y 12 8 4 • 4 2 0 0 02 03 04 05 06 07 . 4 We are also worried that foreign currency funding might come under pressures and hit the Polish consumer • Tighter credit conditions and more restrictive credit policies in the commercial banks will – in combination with higher inflation – weigh negatively on private consumption in 2008 % y/ y Retails sales, Poland, current prices 02 03 04 05 06 35 30 25 20 15 10 5 0 -5 -10 -15 percent • 35 % y/ y 30 25 20 15 10 5 0 -5 -10 -15 01 07 . 50000 New car sales, pr month 45000 50000 40000 40000 35000 35000 30000 30000 25000 25000 20000 20000 45000 15000 percent Private consumption has accelerated strongly. However, the savings ratio is fairly low in Poland and that could pose a long-term threat to private consumption growth percent • percent Private consumption boom 15000 03 04 05 06 07 . 5 30 % y/ y 25 20 15 10 5 0 -5 -10 -15 99 00 % y/ y Investments 01 02 03 04 05 06 30 25 20 15 10 5 0 -5 -10 -15 percent percent Investment growth close to a peak • Investment growth has accelerated strongly since the beginning of 2002 • The continued pick-up in demand, stronger investor sentiment and EU membership have boosted investment growth • That said, we are probably getting close to a peak for investment growth, as global credit concerns and tighter monetary conditions could begin to weigh on Polish investment growth • The property market is probably very close to a peak so construction activity is likely to slowdown in 2008 • Euro2012 could help investment activity in 2009-2010, but not 2008 07 . 6 45 % y/ y, 1 2 mcma 40 << Polish exports 35 30 25 IFO, Germany >> 20 15 10 5 0 -5 00 01 02 03 04 05 06 Index 110.0 107.5 105.0 102.5 100.0 97.5 95.0 92.5 90.0 87.5 85.0 07 08 percent percent Strong German economy helps Polish exports – but for how long? • The German ifo index is defying gravity and has risen again in February and March • The survey is not coming down as fast as expected and hence paints a more robust picture of the German economy than others • We, however, expect a slowdown in the German economy in the coming quarters – that could weigh on Polish exports • Polish competitiveness will gradually weaken in the coming year due to higher wage growth and a fairly strong zloty - but this should not be a major concern .../ figurbibliotek/ 7 Rising inflation will push Polish rates higher 6 percent % 1 4 -day NBP Bill rate >> 7 5 5 4 4 3 2 Both Polish inflation and wage growth have risen significantly in 2008 and inflation remains well above the Polish central bank’s (NBP) inflation target of 2½% y/y. • For the third consecutive month the Polish central bank (NBP) has hiked its key policy rate by 25bp, thereby bringing it to 5.75%. • We expect that NBP will deliver two more hikes during Q2 before going on hold for most of H2 2008. This should bring its leading rate to 6.25% • We expect that inflation will peak in Q3 2008 and then begin to decline, thereby bringing it back within the official range target zone • Going into 2009, we could see a less hawkish stance from the central bank, as the economic activity cools a little, which should reduce some of the inflationary pressures. If food and energy prices stabilise this could pave the way for some easing through 2009-2010 6 3 Inflation target zone percent 7 % y/ y • 2 1 << Inflation, Poland 0 1 0 03 04 05 06 07 08 . 8 • The zloty seems a bit expensive given the recent appreciation of PLN against EUR. But fundamentals also look strong - especially compared to other countries in the region We think that PLN could have further to go during Q2 2008, if the central bank continues to bring up its key rate, but clearly the upside potential over the coming years have become more limited. On the other hand we do not expect any large negative correction in PLN neither % << PLN Strengthening 99 00 01 02 03 04 05 06 5 0 -5 -10 -15 -20 -25 -30 -35 percent % deviation from old currency basket 07 08 . 4.3 % å/ å 4.2 4.1 EUR/ PLN 4.0 3.9 3.8 3.7 3.6 3.5 3.4 Jan May Sep Jan May Sep Jan May Sep Jan 05 06 07 08 9 4.3 4.2 4.1 4.0 3.9 3.8 3.7 3.6 3.5 3.4 percent • 5 0 -5 -10 -15 -20 -25 -30 -35 percent Key drivers of the zloty: • Economic growth • Relative interest rates vs. US and Euroland The political situation • The valuation of the zloty percent FX outlook . 130 Real EUR/ PLN (de-trended) 125 120 115 110 105 100 95 90 85 80 96 98 00 02 130 125 120 115 110 105 100 95 90 85 80 04 06 percent percent PLN pretty close to fair value 08 .../ figurbibliotek/ 10 This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (C) Danske Bank A/S. All rights reserved. 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