Polish Statistics’ estimates of GDP growth were met with a pretty chilly response on the part of some analysts. Few noticed the double-digit increase in value added in construction and in the financial sector.
We can identify at least three reasons for the cool reactions of the observers of the Polish market. Firstly, they were somewhat “spoiled” by the rate of GDP growth in the last three quarters, which stayed within the range of 4.9-5.2 per cent. After a fairly long period of prosperity, public opinion has become accustomed to optimistic signals from the economy and treats them as something natural.
Secondly, the analysis of the decomposition of GDP growth has met with criticism. The results from the first quarter were widely perceived as a threat for the future.
Thirdly, too much attention has been focused on the so-called scale of impact of GDP components on its growth rate — which is calculated by Polish Statistics — while the absolute values have been omitted from the analysis.
We are dealing with an apparent paradox: while in the Q1’18 exports exceeded imports by PLN15.2bn, it was noted that this surplus had a negative contribution to the GDP growth rate (-1.2 percentage points). In the Q1, the share of the positive balance of foreign trade (goods and services) in GDP amounted to 3.1 per cent. However, the growth rate of exports and imports in the previous year is also taken into account in determining the scale of impact. It just so happened that in the Q1’17 exports increased by a record 11.1 per cent, which was the best result in the last seven quarters. Therefore, the negative contribution of net exports resulted from the high reference point. This does not change the fact that the value of exports was worse than a year ago, which was also the case with imports, but to a lesser degree.
The most negative comments concerned the change in inventories (increase in tangible current assets), which is the second element of gross capital formation, alongside investment expenditure. The scale of the positive impact of this item amounted to 1.9 percentage points, accounting for almost one third of the GDP growth rate. In the Q1 inventories increased by PLN16.2bn, while a year earlier they increased by PLN7.8bn and the scale of their impact on the GDP growth rate amounted to 0.5 percentage points.
The above-mentioned confrontation of absolute figures with the results of the model used for the calculation of the scale of impact shows that when interpreting quarterly GDP data we should not focus only on the information about the change in inventories or the balance of trade. In the case of these components, a negative balance may indicate a positive impact on the GDP growth rate, while a positive balance may indicate a negative impact.
Focus on investment
For obvious reasons, observers were mostly interested in the growth rate of investment expenditure. The future of the country’s economic development depends on investment processes. The increase of 8.1 per cent turned out to be the highest in the last 12 quarters: in the Q1’15, an increase of 12.7 per cent was recorded. Despite this relatively good result, observers were left feeling somewhat unsatisfied. Due to the preceding long period of stagnation in the propensity to invest and the launch of wider access to EU funds, many people expected more. Double-digit investment growth was a frequent phenomenon in the best years of the Polish market economy.
Fixed capital formation is a specific economic value. It exhibits strong quarterly seasonality. In light of the national accounts statistics, during the last three years 15-16 per cent of the yearly investment was implemented in the Q1 of the year, while 38-39 per cent was implemented in the last quarter. For this reason, it makes little economic sense to look at the quarterly investment rate, we should instead look at the so-called rolling investment rate from the last four quarters. The Q1’18 brought a disappointment, as the rolling investment rate did not move up in relation to the previous four quarters of 2017 and remained at a low level of 17.7 per cent.
Boosting investment growth, especially in the private sector, including small and medium-sized enterprises (SMEs), should become a priority for Polish economic policy. On the other hand, entrepreneurs’ willingness to invest is being adversely affected by the difficult situation on the labor market (fear of problems finding employees for new production capacities). The situation could be improved by bolder steps towards the introduction of industrial robots in Poland. Poland is among the lowest ranked countries in Europe in terms of saturation of industry with robots.
It is worth pointing out the sustained solid growth in household consumption. In the calculation of the scale of impact, the contribution of this consumption category amounted to 3 percentage points. A growth rate of 4.8 per cent bodes well for the continued stability of this component in the coming quarters. This is confirmed by the results of consumer confidence studies carried out by Statistics Poland (GUS), and especially the moderately optimistic expectations for the next 12 months. If there is no acceleration in the area of investment, consumption will remain the main driver of growth in the next several quarters.
The forecast consensus indicates that the rate of economic growth in all of 2018 will exceed 4 per cent, but the forecasts for the next year are slightly lower, at around 3.5 per cent. This means that we have reached a turning point in the business cycle, i.e. we have reached the peak of the economic recovery phase.
The reasons for the expectations of slower economic growth in Poland include the emergence of various real threats in the global economy and also in Poland’s immediate macroeconomic environment. The internal fiscal policy of president Trump and the initiation of trade wars may lead to tensions in the global financial markets with consequences for economic growth. Brexit and the political turmoil in Italy and other southern European countries could once again shake up the Eurozone. The PLN could be weakened in the face of any turmoil in emerging economies, such as the recently deteriorating atmosphere surrounding Turkey’s economy.
A domestic factor that may lead to the weakening of the growth rate is primarily the situation in the labor market (read more). A shortage of workers is indicated mostly by building contractors and farmers, i.e. entrepreneurs operating in sectors of the economy characterized by high seasonality of demand for employees. Workers from Ukraine are helping to maintain production, but they are becoming increasingly expensive and are looking for jobs that are more suited to their often high qualifications. The labor force reserves among the unemployed persons are no longer able to supply the labor market (due to the low qualifications of these people). Besides, they are mainly concentrated in several counties.
There is also some cause for concern in relation to the inventories that enterprises accumulated in the previous periods. This factor will slow down production due to the necessity of selling the already produced goods. There will also be less demand for materials and raw materials that have been accumulated as inventories.
Bohdan Wyżnikiewicz is the president of the Institute of Economic Forecasts and Analyses in Poland.