GDP growth below two percent? Unfortunately, the risk is serious [CINKCIARZ.PL ANALYSIS]
For more than two months, we have been indicating that the economic growth this year may only amount to two percent. However, the latest CSO data shows the growing risk of failing to achieve even this relatively low value - says Marcin Lipka, Cinkciarz.pl senior analyst.
Yesterday, the CSO indicated that in October the construction and assembly production fell by 20.1 percent YoY. It's yet another month of very poor conditions for the construction industry. Although much of it is a result of smaller infrastructure investments, it is worth noting that Poland’s other macroeconomic readings are also clearly worse than expected.
The industrial production fell by 1.3 percent last month YoY, while retail sales were below the economists’ consensus (4.2 percent YoY) and amounted to 3.7 percent YoY. Pessimistic conclusions can be drawn from the leading indicators. October’s PMI index for Poland, prepared by IHS Markit, fell to its lowest level since September 2014. It has also been indicating the lowest rate of employment growth in the industry for more than two years.
The considerable concern should also cause COS’s study regarding non-financial corporations in the period from January to September 2016, published on Monday. It shows that the investment in the first three quarters of this year fell by 9.1 percent, while in the corresponding period last year, a growth of 12.3 percent was recorded.
It is also worth noting that not only did investment in the "buildings and structures" decrease (by 17.8 percent), but outlays for technical equipment and tools also diminished (by 4.3 percent.) Investments in manufacturing, which saw an increase of 6.1 percent, are looking poorly, while in 2014 and 2015 they were at 17.8 percent and 14.4 percent respectively.
Reasons for poor economic performance
Lower local government unit expenditures answer for a large part of smaller investments. According to the Ministry of Finance cited by PAP, fell from 19.5 to 10.5 billion PLN after three quarters. Since the data on construction and assembly production for October is very weak, we can expect that the local government's outlay will be lower by nearly half of 2015 by the end of the year.
The expenditure on fixed assets is also decreasing in parts of the private sector. According to data from CSO’s September Statistical Bulletin, investments in hotels have dropped off more than 22 percent in the first three quarters of the year. Outlays on office buildings have also decreased (by 12.5 percent.), as well as industrial and warehouse buildings (by 14.6 percent).
The National Bank of Poland (NBP) points out that an important element influencing investments is the uncertainty. In the study entitled "Fast Monitoring,” which was published by the National Bank of Poland at the end of October, we read that “the growing insecurity remains a problem in public enterprises, manufacturing, energy technology and mining.” One of the causes of the recent slowdown in GDP growth may be the fact that both public and private sectors strongly increased their investments in 2014-2015. Currently, apart from the effect of the transition from one to the other EU perspective, the capital investment restricting occurs simply after its strong increase in the past, which is additionally escalated by the uncertainty described earlier.
GDP of less than 2 percent in 2016?
In the GDP calculation, there are three basic components: consumption generated by households, consumption generated by the public sector and investments. The first two components are responsible for the nearly 80 percent economic growth, and a third of them answer for the remaining approximate of 20 percent. The calculations may be affected by the change in inventories and net exports. However, taking into account the estimates of the Ministry of Finance (MF) and the European Commission (EC), as well as the latest data on foreign trade, these components should have a limited impact on the final result in the current year.
Based on the available data, it can be estimated that domestic consumption (public and private) is likely to rise this year by approximately 3.6 percent. This means that it will have a contribution of a level close to 2.9 percentage points.
Over two months ago, we hoped, on the other hand, that investments will shrink this year by approximately 4-5 percent. However, considering recent Central Statistical Office reports, the decline may be more profound and complete in the range of negative 5-6 percent. This means that the contribution of gross outlays of the fixed capital to the GDP may reach negative 1.1 percentage points. As a result, there is a serious risk that the final reading for 2016 will be around 1.8 percent.
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