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The economic boom will disappear soon. How to be prepared?

25 Oct 2017 9:13|Marcin Lipka

“Dynamically increasing GDP, rising wages and decreasing unemployment in Poland and other European countries are due to the economic recovery in the eurozone and in the world. Unfortunately, it is likely that it will be a short-term condition. There are small chances that the 4% growth in Poland will last longer than the next few quarters,” writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

Incoming economic data suggests that 2017 will be the best year for the European economy in the last decade. The eurozone's good condition is due to growing employment in the single currency area, increased investment in the private sector and higher consumption.

The problems that have been bothering the European Union for the past several years. have now moved on. Fears about the eurozone's disintegration seem to be less worrying today. The concerns about the rapid baking or indebtedness crisis, which took place in 2012, have also diminished.

The economy is being stimulated additionally by the ECB's mild monetary policy, resulting in very low debt financing costs, both for the government and the private sector. Most of the concerns about the global economy have also disappeared. China has maintained GDP growth above 6%. Economic development has also accelerated in the US. For the euro area, which is open to foreign markets, this is excellent information.

The tide raises all boats…

Emerging countries benefit the most from the economic recovery across the EU. This is seen in the accounts of the International Monetary Fund. In October, the IMF has increased GDP growth estimates for this year for Turkey from 2.5 to 5.1%, Romania from 4.2 to 5.5%, the Czech Republic from 2.8 to 3.5%. GDP for Poland was revised by the Fund from 0.5 percentage points to 3.8%, but the incoming data gives a big chance to reach the 4% boundary.

In most countries of our region, GDP growth is supported primarily by private consumption, which in turn, increases employment and wages. In general, it is favourable for the economy when people of working age work. However, in the context of, for example, the Czech Republic, where unemployment is the lowest in the whole EU - 2.9% and the employment rate for people aged 20-64 is the highest among the community and amounts to 78.2%. (71.1% in Poland), further significant improvement of the labour market parameters seems to be unlikely.

... but drought causes virtually all of them to fall.

The tightening in the labour market, i.e. the difficulty in obtaining new employees by companies, translates into a very strong increase in wages. According to Eurostat data, in the second quarter of this year wages in the Czech Republic grew by 11.5%. Increasing payments in the short term maintain a positive economic situation. However, in the long term (continuously for several years), a high rate of wage increases can be very difficult to maintain, especially if the productivity improvement pace has not been kept up. This is not only the case of the Czech Republic but also Romania's wages are rising unnaturally fast - by 18.5%. and by 10.7% in Bulgaria. In Poland, the hourly rate increased nominally by 8.3%.

The highly performing economy of our region is now operating well above its potential. This is illustrated by IMF projections for the coming years. In 2020, Romania's growth will slow down to 3.3% from 5.5% currently. According to the Fund's estimates, the Czech Republic's GDP growth will decline from 3.5% over the next three years to 2.3%.

The higher than potential development of the euro area as a whole, which according to IMF estimates will grow by 2.1% this year, but will slow down to 1.6% in 2020. Outside Europe, a significant decline in GDP growth rates has been seen in Japan. If the statements came to life, the development in National Cherry Blossom will slow down from the current 1.5% to 0.2%.

S&P sees many problems in Poland

In Poland, it will be extremely difficult to maintain a very good economic situation longer than for the next few quarters. The IMF estimates that economic growth in Poland will slow down from 3.8% to 2.8% in 2020.

The relatively more pessimistic picture is presented in the last report by S&P Global Ratings. Despite the fact that the agency has increased the perspective of Poland's GDP growth to 4.2%. According to its analysts, the potential development amounts to only 1.5-2% per year mainly due to the decreasing number of workers and ageing population. On the other hand, the EU transfers are responsible for almost half of the current development rate. The report also raises the issue of the risk of "overstimulating" the economy with a too mild monetary and fiscal policy.

S&P also presented very negative forecasts for the current account balance (C/A). The deficit, which currently is close to a few billion zlotys and amounts to less than 0.5%, is expected to be maintained. GDP is expected to increase to 3.8% in 2019 (83 billion PLN), mainly due to the external trade balance's deterioration (from the current surplus we will move towards 70 billion PLN of the deficit). The Agency also expects the inflation rise to 3.5% in two years' time.

With such an economic situation, it is worth dealing with a deficit

Probably, the S&P, out of all the leading research centres in the world, presents the most pessimistic forecasts for Poland. The risk of fulfilling these estimates seems to be limited. On the contrary, the S&P's view that our country does not use the good times to significantly reduce its public deficit and debt seems to be less debatable. According to the European Commission's latest projections, the public finance sector deficit in Poland will amount to 2.9% next year of GDP. This would be the third worst result in the EU after France and Romania, even if the actual result would be slightly better than the European Commission's estimates. The EU average deficit is expected to reach 1.5% of GDP and in the case of Germany, the Czech Republic and Sweden it is expected to reach a surplus.

It is a good time to build your financial cushion

There are many indications that both in Poland and in other countries of our region, we are dealing with a short-term acceleration of GDP growth. Growth exceeding the economic potential and wage growth reaching 10% in some cases will not last forever.

However, households can try to prepare themselves for the hypothetical economic situation worsening by reducing consumption and raising savings. Probably, there will be no better time to start this process. On a global scale, higher savings will not only make it possible to have the financial cushion and prepare for a worse economic period but will also ease investments by Polish enterprises, which instead of using foreign capital will benefit from domestic resources.


25 Oct 2017 9:13|Marcin Lipka

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