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Thursday, August 30, 2007

Polish GDP Q2 2007

Here is the latest preliminary release from the Polish Statistical Office for Q2 GDP:

Poland's economy expanded an annual 6.7 percent in the second quarter, faster than expected, suggesting interest rates may be raised a fourth time this year. Growth in gross domestic product compared with 7.4 percent in the first quarter, the Central Statistical Office reported in Warsaw, and exceeded the 6.1 percent median forecast of 21 economists surveyed by Bloomberg. The economy grew 6 percent in the second quarter of 2006.

In fact the rate of GDP growth in Q2 - which according to my calculations was 0.34% - seems to have slowed from Q1, when it was a fierce 1.6%. This slowdown can be seen in the following chart.

Domestic demand increased year on year by 9.3% in the second quarter, up from 8.6% in the first quarter, and from 5.4 percent in the same period last year. Consumer demand increased 5.1 percent, up from 4.8 percent a year ago, while production grew 6.3 percent, slower than the 9.2 percent growth rate achieved in the second quarter of last year.

The prime contributors to second quarter growth seem to have been fixed investments and a large increase in inventories, which combined boosted annual growth in gross capital formation to 34.2% in the second quarter, up from 26.8% in the first quarter.

Construction, of course, increased considerably - by 17.7 percent - up from 12.1 percent in Q2 2006, but down from the first quarter's 40.1% rate, an output level which had been aided by unusually warm winter weather.Investments rose 22.3 in the second quarter, up from 14.5 percent last year and down from 29.6 percent in the first quarter.

Basically it is very hard to determine anything very clearly at this stage from the provisional data we have. A lot depends on what is happening with the inventories, and where construction is going. As we can see from the following chart, the annual increase in Q2 has slowed somewhat, but this doesn't really mean that the economy is slowing to any significant extent, we need to see more data going forward to decide on this.

What the data does seem to show is that fixed investment has replaced private consumption as the main contributor to growth, and this seems strange. Fixed investment contributed a net 3.8 percentage points to second quarter GDP growth, up from 3.6 percentage points in the first quarter. Private consumption contributed 3.2 percentage points, down from 4.6 in the first quarter.

A negative contribution was made by foreign trade, at -2.6 percentage points, a deeper dent than the -1.1 percentage points registered in the first quarter. Exports increased 7.8% on the year in the second quarter, while imports grew 14.2%. So obviously there are big trade balance issues to think about.

Industrial output growth slowed to 6.3% on the year in the second quarter, from 9.1% in the previous three months. While the services sector expanded 6.0% on the year, down from a 7.4% increase in the first quarter.

Wednesday, August 29, 2007

Polish Central Bank Raises Interest Rates

The Polish central bank raised their benchmark interest rate a third time this year today, as wage growth and household spending coupled with growing labour shortages threaten to push up inflation. The Monetary Policy Council lifted the seven-day reference rate by a quarter of a percentage point to 4.75 percent.

The Polish economy expanded 7.4 percent in the first quarter, which was the fastest pace in a decade. With wages rising at a record pace in the second quarter, policy makers have said inflation may exceed the central bank's 2.5 percent target by the end of the year unless interest rates are lifted again.

In fact average corporate wages grew at an annual rate of 9.3 percent in July, and at a record rate of 8.9 percent in the second quarter. Employment rose 4.7 percent from a year ago in July, while unemployment fell to 12.2 percent and retail sales rose at an astonishing annual 17.1 percent. The inflation rate fell to 2.3 percent in July from 2.6 percent in June. The central bank expects it to rise to 3.3 percent by December if borrowing costs are left unchanged.

The interesting thing to note here, as can be seen from the piece below from Bloomberg, is that the Zloty kept falling despite the rate increase. The weather is changing, and quickly.

Poland's zloty fell for a second day versus the euro as declines in global equity markets prompted investors to shun riskier emerging-market assets.

The zloty dropped along with Turkey's lira and the Slovak koruna as the NTX Index of stocks in central and eastern Europe's 30 biggest companies lost the most in almost two weeks. The Polish currency was the second-worst performer against the euro in Europe after the Romanian leu.

``Investors are growing increasingly nervous and the declines in equity prices are taking their toll on emerging market currencies,'' said Michal Dybula, central European economist at BNP Paribas SA in Warsaw. ``We may see more losses if U.S. stocks open lower today.''

Against the euro, the zloty fell to a one-week low of 3.8495 and was at 3.8454 by 11:36 a.m. in Warsaw from 3.8302 yesterday. It may extend its drop to 3.9 by the end of 2007, Dybula said.

Monday, August 27, 2007

Katarzyna Zajdel-Kurowska and the Euro

Poland's Deputy Finance Minister Katarzyna Zajdel-Kurowska is widely quoted this morning as saying:

``Poland is definitely on the way to the euro.''

She made this statement after revealing that Poland's 2007 budget deficit will be narrower than the government's original forecast. I have no idea when or whether Poland will enter the euro, but I would say that, as in the case of the Baltics, the potential labour shortage issue, and the problem of wage and cost push inflation that this will generate is a much more important medium term obstacle to Poland's euro membership than the budget deficit issue is.

Friday, August 24, 2007

Poland, Retail Sales July 2007

Retail sales in Poland rose in July by 17.1 percent from July 2006 and 1.7 percent from June, according to the Warsaw-based statistics office this morning. This was the fastest annual pace in four months, and has raised expectations that interest rates will be increased for a third time this year, maybe as early as next week.

Variations in the monthly index can be seen in the chart below.

And the rapid rate of increase can be observed in the next chart which shows annual change each month.

Consumer demand, which is being driven by the fastest growth of wages in six years and a record increase in the number of new jobs, is putting considerable pressure on inflation, and this has already produced a half percentage-point increase in the benchmark interest rate earlier this year. Today's data may lead monetary policy makers to raise the interest rate again as early as at their next meeting on Aug. 28-29.

In a separate report, the office said the rate of unemployment in July dropped to 12.2 percent from 12.4 percent in June. The number of unemployed totaled 1.86 million people, or 39,000 fewer then in June and 587,000 below July last year, when the rate was 15.7 percent. The unemployment data confirmed estimates of the Labor Ministry published on Aug. 8.

The zloty was trading at 3.8389 per euro at 10:05 a.m. in Warsaw, up from 3.847 yesterday. The yield on the government's five-year bonds was unchanged for a second day at 5.69 percent.

Thursday, August 23, 2007

Polish Migrants More Choosy About Their Jobs in the UK

Signs are growing that the tide of Poles going to work in Britain may have peaked.

According to the UK Home Office, the number of workers applying to work in the UK from the A8 countries – the eight eastern and central European nations of the As analysed by Latvian Abroad here, almost two-thirds of the 683,000 workers who have applied to work in the UK from A8 countries have come from Poland.

The latest UK figures appear to show that eastern and central European migrants had started to move up the jobs chain and are occupying more professional positions.

Some 41 per cent of registered workers applied to work in administration, business or management posts during the latest quarter. This compared with 25 per cent three years ago when Britain opened its job market to A8 workers.

On the other hand, UK fruit and vegetable growers have warned this week that they are facing a struggle to attract sufficient eastern and central Europeans to harvest their crops because A8 workers had become more choosy about the work they undertook.

According to the Home Office the hospitality industry has accounted for 19 per cent of jobs filled by A8 workers, and agriculture 11 per cent, since 2004.

Wednesday, August 22, 2007

Running out of Capacity in Central and Eastern Europe

By Claus Vistesen

Cross Posted From Alpha Sources

Well, it is pretty much official now I think that some countries in Eastern Europe might be heading for an economic crash. As such, both the FT and the Economist recently ran articles on this topic in which warnings were duly handed out. On the record, I am pretty convinced myself that some countries might crash very soon among those the most notable candidates being Latvia and Lithuania. Behind this doom and gloom call is a very simple hypothesis that demographics matter for economic growth and that this fact is now hitting home big time in the CEE countries proxied by dwindling capacity to match expectations of economic growth and prosperity. Of course I am sad to say, the mainstream coverage cited above did not have the faintest squeak about demographics and the unique population regime in which the CEE countries are situated. For that reason I recommend you to read Edward Hugh's recent post at AFOE in which he pins the Economist, his note on Latvia as well as my own analysis on Lithuania. In this entry I am looking at Poland in much the same way that I have been looking recently at Lithuania. Clearly, Poland are Lithuania are different not only because of the differences in size but also because Poland seems to be equipped with much more spare capacity than is presently the case in Lithuania and the other Baltic countries for that matter. I have marked 'seems' in italic since whereas Poland's unemployment rate is still in double digit territory accounts of substantial labour shortages are mounting which suggests that high growth regions in Poland are fast running out of qualified labour. In this way, the trend in the labour force is very similar to Lithuania but where Lithuania represents a small single deck frigate which is set to quickly succumb to any water intake Poland perhaps resembles more the Titanic. However, as I will demonstrate below, through graphs, the tendency is the same which only further substantiates the claim that when it comes to the CEE economies it is in fact, at this point, all about demographics and even though I realize that I am biased in my view here from the offset I just cannot see how any reasonable economist would be able to argue otherwise.

Let us look at the data then and more specifically the short term indicators on economic growth which show how growth and wage costs have been picking up the pace lately which also shows itself in a widening current account deficit. The first graph plots (in % y-o-y) growth in GDP, wage costs and industrial production, the second plots retail sales and the third plots the evolution of the current account deficit. Note that while the graphs for GDP(etc) and the current account share time perspective in the form of quarterly indicators the graph for retail sales plots monthly y-o-y % growth rates.




As can readily be seen, growth in Poland had been indeed picking up the pace in the past year. This has naturally pushed up the demand for labour with an ensuing rather dramatic tightening of the labour market to follow. Also wage costs are beginning to rise rapidly and as the Economist Intelligence Unit reports (sorry, no link available) labour productivity is not able to follow the speeds of wage increases which of course questions the sustainability of this brisk growth spurt. This is accentuated in the following quote which cites the view of JPMorgan ...

In Poland, JPMorgan expects the dataflow over the next two weeks to confirm that “the labour market continues to tighten fast and that the labor productivity-wage relationship is deteriorating."

Curiously, wage costs are yet to show up in core inflation and producer price inflation where growth is still very moderate relative to the overall economic growth rate. It serves to remember here that the Polish unemployment rate is still in double digit territory which indicates that capacity needs to be a bit more strained for pressures in CPI and PPI indices to take hold.

Like I argued with Lithuania I believe it is important to take a long hard look at the Polish labour market and population dynamics in order to see what is really going on. Regarding the latter, Poland is inhabited by about 39 million people and as almost all other CEE countries Poland is set to age very rapid as a result of a severe stagnation in fertility from 1990 and onwards still lingering today. This is a very important point to remember as we move through the graphs below. Let us begin with a long term indicator of migration flows which demonstrate that Poland has suffered from a net-outflow since 2001. The numbers might seem puny in relation to the general population size but remember two things. Firstly, Poland's demographic profile is already damaged as a result of the fertility decline and secondly that all evidence suggests the skill component of the net outflow results in a loss of net value added from the point of view of the Polish economy. In short, even if the numbers are small Poland can hardly afford to lose these people if catch-up growth is to be sustained.


This brings us to the general labour market dynamics which are presented below in terms of short-term indicators which share the time perspective as the economic data above. Essentially, two identical time series for unemployment are presented with the first being in real numbers and the second in percentage of the workforce.



Clearly, the situation in Poland is very different from Lithuania and as such unemployment in Poland still linger in double digit territory. However, this will not go on for much longer if the current growth rates are sustained and this is where the problems begin to emerge. As such, you could choose to flag optimism in Poland on the basis of what is after all very impressive economic momentum which at this point is even welcomely deviating from nudging up core inflation rates. However, this is also at the core of the problem with almost all CEE countries in the midst of what is currently an unprecedented spurt of global growth. These economies are thus growing briskly, quite naturally, as emerging economies but with the important qualifier that they have extremely mature and essentially loop sided demographic profiles. This means that given the underlying capacity constraints these economies are faced with they are quite simply growing much faster than is sustainable in any meaningful sense of the word. This has then, at this point, obviously caught up with market participants and financial commentators but my guess is that it is moving way faster than many seem to think. Clearly, Poland is not Lithuania where the time span is already under one year but it still raises the question of just how much further this can go given the underlying structural capacity issues. Also remember here that while structural remedies such as raising labour force participation rates as well to address the skill mismatch on the domestic labour market should be strongly advised this is just moving so fast in some countries that this really does not seem to be a viable solution to address what is clearly becoming a short term issue with long term and structural drivers. In the end, what we have now regarding the CEE economies is evidence that a demographic profile wholly out of sync with the economic stage of development effectively can halt the process of catch-up growth. In order to ram this point home here at the end we need to look at productivity and how brisk productivity needs to grow in order follow suit. And this is just the point; catch-up growth and productivity increase as an economy moves up the value chain takes time and time is exactly what the CEE countries do not have at this point with the current growth rates.


This was really the end of this entry but if you want to catch a glimpse of how fast this might be moving I invite you to read on. However, beware ... dodgy empirical methods and math will follow! Let us try then to do a thought experiment and ask the question, how far will it take for the Polish economy to reach a 'critical' level of unemployment rate where 'critical' here is defined as either a 3% or 5% unemployment rate?

Well, before we move I need to attach some important qualifiers.

Firstly, the following thought experiment does very little to represent sound empirical economics but the general approach is still worth while I think. As such, we know that rapidly ageing societies, especially those growing rapidly as is the case here, will tend to face a structural decline in the unemployment rate and/or the labour force as more people leave the labour force compared to entrants. Add to this, in the Polish case, the trend of net outward migration as well as the high economic growth rates and suddenly an unemployment rate of 10% becomes a rather small buffer. Secondly, be aware since math will now follow. I rarely do this at Alpha.Sources and I promise you that it will not turn into a habit but I think that it is important in this case.

Regarding the method I have already hedged my bets above and please do note that the underlying assumption of trend perpetuity in the following experiment makes the predictive power virtually useless, at least at the time horizon we will be looking at. So, what are we in fact looking at?

Well, based on rough and ready calculations the average monthly decline in the unemployment rate in Poland between July-06 and May-07 stood at a monthly decline of 2.4% (i.e. in absolute terms). Based on an all things equal approach, assuming trend perpetuity, how far would it take for Poland to reach an unemployment rate of 3% and 5% respectively? To answer this we use the common expression for time value of money as an imperfect yet useful approximation:

FV = PV(1+r)n (in our case -n but that is of little matter)

where FV denotes future value at time n, PV the present value at time 0, r is the compound rate at each period, and finally n denotes the periods. In our little experiment we approximate the expression to our need by assigning the values as follows;

FV: 3% and 5%

PV 10,5% (unemployment in May 07)

r: 2.4% (average monthly decline)

n: ? (i.e. this is what we want to find out)

Calculating for 3% ...

3 = 10,5(1.024)n

solving for n ... (a bit complicated but Excel delivers in a heartbeat)

In(3/10,5)/In(1.024) = -52.8

Which translates into about 53 months to reach an unemployment rate of 3% or 53/12 = 4.4 years assuming trend perpetuity.

Calculating for 5% ...

5 = 10,5(1.024)n

solving for n ...

In(5/10,5)/In(1.024) = -31.2

Which translates into about 31 months to reach an unemployment rate of 5% or 31/12 = 2.6 years assuming trend perpetuity.

So, was this useful at all? Well, perhaps not but do note that the assumption of 'perpetuity' as regards to a structural decline in the labour force/unemployment rate is not entirely voodoo magic when we think about the CEE societies. Clearly however, the process will be subject to notable nonlinearities as we approach ever lower levels and furthermore it is not certain that the current cyclical economic boost will continue. But the point is that, at the pace with which this is moving it is difficult to see how structural mechanisms such as improving labour market institutions, raising participation rates, and addressing the skill mismatch can keep up with the structural and cyclical run on the level of capacity if it continues much longer. Especially, the fact that these countries are now targets for a substantial part of new global credit suggests that the pressure is very high indeed. Note also that many central banks in the region would be effectively unable to act as a lot credit is denominated in foreign currency. As such, an aggressive turn of monetary policy to the loose side would entail severe balance sheet issues as the countries' domestic currencies most likely would plummet. Effectively this would mean strong appreciation of the liability side (denominated in e.g. Euro) relative to the asset side (denominated in the domestic currency).

In the end, whatever rate of decline we assign in our little pet model here we are looking at a horizon in most CEE countries where labour markets are set to tighten significantly in the next 2 years and in some countries it will move much faster than this.

Monday, August 20, 2007

Poland: Lower inflation, but worrying credit growth

From Danske Bank:

Poland: Lower inflation, but worrying credit growth
Polish inflation eased to 2.3% y/y in July from 2.6% y/y - in line with our forecast, but a bit below the consensus expectation (from Reuters) of 2.4% y/y. The inflation numbers do not give us any reason to change our expectation for the Polish markets and monetary policy. The drop in inflation is mostly due to a fairly strong base effect. That said, there are clearly inflationary pressures in the Polish economy and we would expect inflation to inch upward towards 3% by the end of the year. The inflationary pressure in Poland stems from the supply as well as the demand side of the economy. We are mostly concerned that the tighter labour market situation will increase wage pressure, but the risk of zloty weakness and higher food prices poses some inflationary risk. However, we expect the Polish central bank (NBP) to especially focus on wage development as an indicator for future inflationary pressure. We continue to expect the NBP to hike rates twice more this year (two times 25bp), but the NBP is likely to keep rates on hold at this month’s monetary policy meeting. Today we also got money supply and credit growth numbers. The money supply (M3) grew 19.3% y/y – a bit on the high side, but more importantly, the credit growth to households continues to accelerate. Hence, credit growth to households was 40.1% y/y in July – up from 37.6% in June. Until now we have not been overly concerned about lending growth in Poland – at least not compared to other countries in the region – but this kind of credit growth is clearly not sustainable in the longer run.

Polish Industrial Output July 2007

Polish industrial output rose at a 10.4 percent on the year in July 2007, and declined 2 percent from June, according to the Warsaw-based Central Statistical Office today.

The annual pace of growth almost doubled from last month and for the first time in three months has outpaced wage growth.

Tuesday, August 14, 2007

Polish Fertility

This post is a brief "state of the game" one to accompany our recent material on capacity problems in the Polish labour market. First off, it is interesting to note that there is a debate inside Poland which is begining to wake up to this problem, as the following link from the External service of Polish Radio shows. In fact they make the claim that in 2005 Poland had the lowest fertility in the EU, at 1.24:

The declining birth rate observed for years has prompted the government to come up with a long-term pro-family program, which is expected to encourage women to have more kids. Poland’s fertility rate - that is the number of children per one woman – is the lowest in Europe. In 2005 it was 1.24, whereas the EU average is 1.5, according to a report just published by the statistical office of the European Union – Eurostat.

Actually, it isn't clear that Poland still has the lowest fertility in the EU, since according to the 2006 CIA factbook, by 2006 Polish fertility had sneaked back up to 1.26 Tfr, whilst the Czech Republic was down at the 1.24 level. However - as can be seen from the graph below - whichever way you look at it, Poland has a serious fertility problem, and one which is set to only make those labour shortages currently being experienced worse with time.

Poland's population has been in natural decline since the early years of this century:

“Since 1984 the number of children born in Poland has been decreasing. In 1999, for the first time, the number of deaths exceeded the number of births. We have a truly difficult demographic situation”. A number of factors are at play causing women to postpone childbirth and to have less children. Aneta Seibert from the Gender Equality Coalition explains.

As suggested in the article, one for the reasons for the strength of the decline in Poland has been - as elsewhere - birth postponement:

Since the median age at first birth of Polish women is still in the mid twenties, and thus some way below the current Western European norm of 29-30, it would appear that this postponement process still has some way to run.

But in addition to the general postponement process, there are number of other factors at work, which stem from the traditional nature of Polish society:

“One is very evident discrimination of women on the labor market associated with the fact that that they are mothers or that they may become mothers. There is a very wrong assumption among Polish employers that once you become a mother somehow your qualifications disappear along with your commitment to work.”


Another important factor is lack of institutionalized good quality and affordable child care, especially for children under 3. “In Poland only 2 percent of children under 3 attend organized child care while in other countries it’s over 50 percent, similarly with kindergartens.”

Now the response to all of this has been an attempt by the Polish government to give more support to would be parents, the problem is that this costs money, and money is what the Polish government is not exactly flush with given the need to control the deficit and reduce the tax wedge (as mentioned in the last post). So there seems to be a kind of self-reinforcing double-bind at work here.

The government is preparing a comprehensive program of support for the family. Some 5.9 billion US dollars may be spent until 2014 on pro-family measures such as extended maternity benefits, tax breaks for families with several children.

As some of the skeptics claim, all of this may be far short of what is needed, but the question still remains, where is the money going to come from?

The BBC also had an article on the new initiative as well as this more general article on the decline of childbirth in Poland. Essentially the BBC also highlight the missmatch between a rapidly evolving society - and in particular a changing labour market - and the presence of traditional values:

If you asked many people which countries are the most Catholic and traditional in Europe, they would probably answer either Ireland or Poland. And in many respects they would be right. Anna Jurczak, who has six-month-old twin boys. Women's expectations of men are changing, says Anna Jurczak According to surveys, around two-thirds of Poles go to church every Sunday and 70% say that family and children are the most important things in their lives....

So why are family-oriented Poles having fewer babies? It is partly because there is a difference between what people say and what they do. And it is also because Polish society has been undergoing profound changes in recent decades.

First, more and more young people, especially women, are going to college and university.

"Women are becoming more and more demanding. They want to get a job and career first so they're not dependent on their husband later," says 34-year-old Anna Jurczak, who has six-month-old twin boys. "Twenty years ago you had to get married young but in our generation, my friends and I, first of all we want to find a good job and then we can find someone we can love." And women are getting more choosy when it comes to picking a suitable husband, she says.

Another dramatic change came with the transition from communism to a market-based economy. Under communism unemployment officially didn't exist. Now, at 18%, it's the highest in the European Union.

As well as concerns about job security, there is a chronic housing shortage and many young people live with their parents because they cannot afford a flat. The cost of raising a family is also increasing.Another reason why women are reluctant to break their career to start a family is because they fear they won't be able to get their jobs back after taking maternity leave.

Finally, I think one think needs to be borne clearly in mind here. Any success in nudging fertility back up again using the kinds of measures which are presently discussed will only have any kind of impact on the labour market in over 20 years time, and in the meantime the brunt of the labour shortages problem I spoke about in the last post is really going to lock in between now and 2020.

Which isn't to say that you don't need to address the low-fertility issue, but simply that this alone isn't going to be enough.