Merry Xmas and A Happy New Year

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.



Credit crunch, did someone use the expression credit crunch?

The Polish Economy: An Unlimited Need For People?

The gentleman in the photo is Konrad Jaskola, Chief Executive Officer of Polimex-Mostostal SA, Poland's biggest construction company, and according to this article in Bloomberg, he has just one message for us all: "I have an unlimited need for people".


The issue arising is that Joskola has plans to hire "several thousand" new workers next year to meet demand for new bridges and factories, but he has a problem, and the problem is that due to Poland's growing labour shortages he may have difficulty finding them. Poland's economy has been growing strongly in recent quarters, although not as strongly, it should be noted, in some of the more evidently "overheating" economies like the Baltics. Poland's economy expanded an annual 6.4 percent in the third quarter of 2007, following 6.7 percent growth in the second quarter and 6.8 percent in the first one, according to data released by the Warsaw-based Central Statistical Office at the end of November.





This strong growth rate is partly fueled by construction activity and partly by strong consumer demand for retail items like cars and washing machines. Construction in Poland rose 20 percent in the first nine months of 2007, and as can be seen in the chart below - which offers a breakdown of Polish GDP growth by components, construction has been playing a very important part in the process. The thing is, however, that construction activity is pretty labour intensive.





According to Joskola, Polimex needs to offer higher salaries across the board, to engineers and managers, and to on-the-ground site workers, as Poland's skilled workers steadily move abroad (like all that hedge fund money which is flowing in the opposite direction) in search of higher yield. As a result local competition for workers increases, and wages start strong upward climb. Polimex has raised wages by 11 percent over the last 12 months and plans to raise them them by a further 10 percent next year.


The company, which is a "recycled" formerly state-owned machinery supplier, established to drive Poland's post-World War II reconstruction effort, currently plans to spend as much as 200 million zloty on acquisitions next year, in order to add workers and production capacity. I imagine some, at least, of those acquisitions will have to be of workers coming from outside Poland.

Inflation On An Upward Path

Meantime Polish inflation accelerated to the upper end of central bank's target range in November on the back of higher food and oil prices, meaning policy makers at the central bank may be forced to raise interest rates again in the coming months, in so doing possibly pushing up the value of the zloty, and attracting even more funds in search of even more workers to put to work.

Polish inflation rate rose to 3.6 an annual percent in November from 3 percent in October, the Central Statistical Office reported today in Warsaw. Consumer prices gained a monthly 0.7 percent after rising 0.6 percent in the previous month. Food prices grew an annual 7.2 percent 1.3 percent from the previous month, while fuel prices soared 13.2 percent from November 2006 and 2.5 percent from last month




As Unemployment Continues To Fall

The unemployment rate fell for the ninth consecutive month in October to 11.3 percent from 11.6 percent in September, the office said in a separate report today. Earlier this month, the office said that average corporate wages advanced an annual 11 percent in October and employment grew a record 5 percent from the year before.



And Wages Continue To Rise



As I say, inflation in Poland is also being fed by a 10 percent average wage growth and record low unemployment this year. In fact Polish average corporate wages advanced in November at the fastest pace in more than seven years, suggesting that the very rapid economic growth and large scale out-migration of key age group workers may be squeezing the labour market more than people imagined, thus provoking the sharp rise in inflation. Wages rose at an annual 12 percent rate (and 4.8 percent from a month earlier) to 3,092.01 zloty, according to the Warsaw-based Central Statistical Office earlier this week.




While Remittances Continue to Flow in Strongly

Remittances from abroad, mostly by taking advantage of free movement of labor within the European Union, are currently estimated (by the Polish National Bank) to be worth almost 2.5% of the gross domestic product of 250 billion euros. Since the United Kingdom opened its labor market to Poles three years ago, at least half a million Poles have settled in Britain.

Marcin Korolec, under-secretary at Poland's ministry of economics is quoted as saying that "the statistics show that the transfer from Polish people working abroad is something like 6 billion euros a year....Obviously this is a huge amount of capital, a huge amount of flow. It has an impact on internal consumption and internal growth."




All of Which Produces A Rapid Rise in Sales

Polish October retail continued their rapid rate of annual increase adding to evidence that economic growth remains strong despite four interest rate increases from the Central Bank so far this year. Retail sales rose an inflation corrected 16.3% in October over October 2006, this was up from a 12.2% rise in September compared with 14.2 percent in September, according to the Warsaw-based statistics office today.





The growth which is driven by sales of vehicles (which rose 42% year on year) and sales furniture and household appliances (a 21.9% annual rate of increase) - confirms the impression that consumer demand is being bolstered by falling unemployment, which dipped to an 8 1/2-year low, higher wages, which last rose the most in seven years last month, and a steady and economically significant inward flow of remittances.


Monetary Policy in A Bind?


The central bank lifted the seven-day reference rate a quarter-point to 5 percent only last month, and this was the fourth increase since April, when the key rate was 4 percent. So as we can see, at this point of time , and against all traditional expectation, monetary tightening may actually be having the perverse effect of accelerating the economy.



At the same time the zloty continues its rise, trading at 3.58 to the euro after the release of this weeks wages data, holding near its highest in five and a half years.


So as the Monetary Council begins its 2 day meeting for December today, we can see that there are some difficult decisions to take. Members of the council have already made public some of their divergences, with policy maker Marian Noga having taken the view that "The sooner we have the hike, the better, as preventive action is cheaper than boosting rates to chase down inflation", while Council member Miroslaw Pietrewicz takes the view that Poland's central bank should delay raising the benchmark interest rate until policy makers have had time to assess whether the four increases already made so far this year have been sufficient to bring inflation into check in the mid term.

What this dispute is a reflection of are the serious issues which arise concerning the actual ability of conventional monetary policy to work in a situation like the one facing Poland, since raising interest rates may just as easily stoke up more inflation - as we have seen in Australia and New Zealand, and to some extent in China - by attracting more investment funds into the country. This issue became apparent when the zloty also gained after a central-bank policy maker Marian Noga said the interest rate may have to rise as much as three-quarters of a percentage point before the end of 2008 to ward off inflation. Normally, an impending rise in inflation and a monetary tightening process (which reduces growth) would be considered to weaken and not strengthen a currency. So what happens next? Well this is just what we don't know, since we have never been here before. Clearly these economies will continue accelerating till the day they can't. And after that, well we will have to wait till we get there to actually see. What is happening in Hungary may give us some clues, and what happens next in the Baltics will definitely provide another of the missing links. Meantime we are in "wait and see" mode I feel. And behind Poland, roaring down the track come Russia and Ukraine, remember.

Poland Wages November 2007

Polish average corporate wages advanced in November at the fastest pace in more than seven years, suggesting very rapid economic growth and large scale out migration of key age group workers may be squeezing the labour market more than people imagined, and provoking a sharp rise in inflation. Wages rose at an annual 12 percent rate (and 4.8 percent from a month earlier) to 3,092.01 zloty, according to the Warsaw-based Central Statistical Office earlier today.




The central bank-led Monetary Policy Council last month raised its key seven-day reference rate for a fourth time this year in an attempt to contain inflation. The November inflation rate rose to 3.6 percent, above the upper end of the central bank's target range of 1.5-2.5 percent. The Monetary Policy Council will start its monthly two-day meeting tomorrow, but the bank is in something of a double bind here, since raising interest rates will only attract more capital inflows in the short term, and more capital is not what Poland needs, since it is this capital looking for people to employ that is provoking the overheating, in Poland and across the EU 10.

Employment in the private sectors also grew by 5 percent from November 2006, rising 0.3 percent on the month to a new total of 5.3 million. The zloty traded at 3.618 per euro at 2:40 p.m. today, unchanged from before the report and from Friday.

The Rise and Rise of the Zloty

The Polish zloty gained again today, rising a 5 1/2-year high against the euro as risk appetite improved and investors bet the interest-rate difference with the U.S. will widen. The zloty, which has been the best performer in a group of 26 emerging-market currencies, has gained 6.2 percent since April, when the central bank began raising its reference rate in four quarter point stages to its current 5 percent level . Federal Reserve Vice Chairman Donald Kohn has recently acknowledged the threat to US consumer spending which could result from a reduced access to credit, stoking expectations that the Fed will lower interest rates for a third straight time on Dec. 11.




The zloty rose as much as 0.2 percent to 3.6036 per euro today, the highest since May 2002, and was at 3.6070 by 11:31 a.m. in Warsaw, from 3.6121 late yesterday. All of this raises important questions about the actual ability of conventional monetary policy to work in Poland, since raising rates may just as easily stoke up more inflation - as we have seen in Australia and New Zealand, and to some extent in China - by attracting more investment funds into the country. This issue became apparent when the zloty also gained after a central-bank policy maker Marian Noga said the interest rate may have to rise as much as three-quarters of a percentage point before the end of 2008 to ward off inflation. Normally, an impending rise in inflation and a monetary tightening process (which reduces growth) would be considered to weaken and not strengthen a currency.

``The sooner we have the hike, the better, as preventive action is
cheaper than boosting rates to chase down inflation,''
Marian Noga.

Faster-than-expected economic growth in the third quarter and a drop in unemployment have increased the chances inflation will breach the 3.5 percent upper limit of the central bank's target. The inflation rate, which rose to 3 percent in October, first exceeded the target's 2.5 percent midrange in June.

Noga said the repurchase rate may have to rise to between 5.5 percent and 5.75 percent in quarter-point moves to quell consumer- price growth. ``Moves by 25 basis points are reasoned and balanced,'' Noga was quoted as saying in an interview in Warsaw.

Growth continued at the strong annual rate of 6.4 percent in the third quarter of 2007, according to data released by the Warsaw-based National Statistics Institute earlier this week. Year on year retail sales rose in October by 10 percent, while sales of manufactured goods increased 14 percent on year in October.

Not everyone in the central bank agrees with Marian Noga, however. Monetary Policy Council member Miroslaw Pietrewicz has said that Poland's central bank should delay raising the benchmark interest rate until policy makers assess whether four increases this year have contained inflation.

The increases are ``a lot and the first results could be visible in the second half of next year,'' Pietrewicz, 66, said is quoted as saying in an interview earlier today in Warsaw. "Inflation is currently driven by factors that cannot be influenced by monetary policy", while any further increases "could boost inflationary expectations."

Pietrewicz's comments may signal a split in the council about the future direction of monetary policy and is an indication of the difficulties the central bank will have in controlling inflation in the years when Poland is trying to enter a euro adoption process.

Poland's inflation rate, which was at 3 percent in October, probably reached the 3.5 percent upper limit of the central bank's target in November because of rising food costs around Europe, the Finance Ministry said on Dec. 3. The Organization for Economic Cooperation and Development said today Polish consumer-price growth will accelerate to 3.6 percent next year.

Pietrewicz takes the view that such predictions don't necessarily "require a reaction from us, because first of all, we need to be sure that this acceleration is not a one-time jump generated by food prices, as it was in October"......."It's too early to figure this out in December".

The government also plans to reduce the budget deficit to 27 billion zloty ($11 billion) from the targeted 28.6 billion zloty.