GDP will only increase by 2% in 2016 [CINKCIARZ.PL ANALYSIS]
A few months ago, the government and main analytic centers have been assuming a 3.5-3.8% development for the Polish economy in 2016. The recent breakdown of investments, as well as a slower than expected increase in consumption have clearly increased the risk that the GDP will only grow by 2% this year.
According to the government's assumptions for this year, the Polish economy was estimated to increase 3.8%. The same estimates were presented in the Inflation Project in March. Only the European Commission was slightly less optimistic in its forecasts. In the spring, it has estimated a 3.7% increase of the GDP.
The National Bank of Poland (NBP) has also revised its expectations relatively quickly. The institution reduced its forecasts to the 3.2% level in July. This was before a weak GDP reading for the second quarter. However, according to the announcement from the end of August, the Ministry of Finance is still counting on a 3.4% economic growth. It is very unlikely that the GDP would achieve a result above 3%, taking into consideration its current growth structure. However, the risk that it would get near the 2% level is beginning to increase significantly.
Very weak data from second quarter
The data from the second quarter is not that negative at first sight. The GDP increased by 3.1% y/y, but the structure of this growth is very disturbing. Most of all, investments went down and they currently are at the level of negative 4.9% y/y. Even though this decrease is partially a result of a delay in spending benefits from the prospect of the EU, there is a small chance that the data would return to a positive level by the end of the year, especially taking into consideration such a sudden breakdown.
An increase in private consumption was relatively slow as well (3.2% y/y). In the forecasts from May 3rd, the European Commission estimated that this year would end with a 4.1% level increase. This also seems very unlikely, even if we include the impact of the 500+ program, improving the situation in the labor market and the rapid increase in salaries.
It's also worth noting that the GDP increase could have already been definitely lower in the past quarter (approximately 2.5% y/y). This is because it was increased by 0.5 percentage point by a positive impact of supplies. However, in the long-term, the supplies strive towards zero. Therefore, they should be deleted from the GDP calculations.
The recent export income (positive 0.8 percentage point) can also be interpreted positively. However, this value is basically impossible to be sustained until the end of the year. This is because it was mainly a result of a very positive trading balance for June. In July, we were observing a deficit on the current account. Additionally, according to the Ministry of Economy announcement from September 12th that was cited by the Polish Press Agency (PAP), this year's positive balance of trading turnovers has been revised from positive 7.4 billion euro to positive 4.0 billion euro. This is basically the same result as 2015. This means that the contribution of net export to the GDP should fade away in the forthcoming quarters.
Not only negative information
On one hand, weak economic growth is mostly bad news. It increases the risk of the rating's downgrade, as well as decreases the attractiveness of Poland as a place for foreign investments. However, we may also find positive aspects of the recent negative indexes. Primarily, a worse than expected consumption combined with an increasing amount of employed people and increasing salaries, means that Poles can save more money.
On the other hand, a lower level of public investments is a chance for a lower then estimated deficit in the public finance sector. According to information from the Ministry of Finance from the second half of August, the budget surplus of local governments was at the level of 16.5 billion PLN, while the estimates were at the level of more than 9 billion PLN.
The current consumption, which is slower than expected, as well as investments which are stimulated by EU programs, increase the chances for a relatively positive situation next year. Of course, in order to make this positive scenario become an actuality, the pace of economic activity in Europe has to at least be at a satisfactory level. Alternatively, if the EU condition deteriorates, the recent slowdown in Poland would increase clearly. This could endanger not only next year's tight budget, but Poland's loan credibility and the zloty as well.
What will GDP be in 2016?
According to Poland's Long-term Financial Plan, which was published by the Ministry of Finance at the end of April, the pace of private consumption (responsible for approximately 60% of the entire GDP) was estimated to grow by 4.0% this year. However, taking into consideration the previous data, this increase will most likely be near 3.2-3.3%. This will take away approximately 0.5 percentage points from the initial GDP estimates (3.8%). The public consumption should be slightly higher than initial estimates, and may add 0.1 percentage point to the entire growth.
After the second quarter, investments have been reduced by approximately 5%, whereas the Ministry of Finance expected a 4.7% increase over the entire year. The pace in which the gross outlays for durable goods have been shrinking will probably withhold a little bit. However, it's possible to remain in the area of negative 4.0% at the end of the year. Due to the fact that investments are approximately 20% of the entire GDP, the difference between the plan and the actual reading may be near negative 1.7-1.8 percentage points.
It's very difficult to estimate the contribution of change in supplies. In the forecasts from spring, the European Commission expected it to be neutral. On the other hand, the Ministry of Finance estimated a 0.3 percentage point increase. Therefore, it's safe to assume that the increase will be at the level of approximately 0.2 percentage points.
When it comes to export contribution, the expectations of the European Commission, as well as of the Ministry of Finance, were within the range of negative 0.2-0.3 percentage points. However, reality may appear more optimistic in this case. The result will probably be near zero in the case of product turnovers, and judging from the recent NBP data regarding current accounts, the services balance look relatively positive. Therefore, net export will most likely add approximately 0.2 percentage points.
As a result, starting from initial GDP estimations from the Ministry of Finance (3.8%) and making simple calculations of expected changes in contribution of particular components (private consumption – negative 0.5 percentage points, public consumption – positive 0.1 percentage points, investments – negative 1.8 percentage points, supplies – positive 0.2 percentage points, net export – positive 0.2 percentage points), we will receive an approximately 2.0% growth for all of 2016.
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