This was repeatedly told by members of the media and analysts during the presentation of Narodowy Bank Polski (NBP – Polish central bank) Inflation Report ‒ November 2015 on November 9th. However, the sustainable growth of GDP, likely to reach 3.5 per cent in 2017, may be hampered by developments in the global economy, in China in particular.
The forecast scenario of the Inflation Report has not changed for a long time. The GDP growth forecasts have been slightly revised downward since the previous July 2015 projection: to 3.4 per cent in 2015 (from 3.6 per cent), 3.3 per cent in 2016 (-0.1 percentage point) and to 3.5 per cent (-0.1 percentage point) in 2017. The CPI inflation forecasts have also been cut slightly. According to the November 2015 projection, it will amount to -0.8 per cent this year, 1.1 per cent in 2016 (vs. 1.5 per cent in the previous projection) and 1.5 per cent in 2017 (vs. 1.6 per cent previously).
GDP growth will be driven by rising consumer spending and growing investment expenditures in the domestic private sector amidst a negative contribution of net exports. Private consumption is to be boosted by the good situation in the labor market (falling unemployment, acceleration in wage growth). Also, investment growth will continue at a robust pace, and will exceed GDP growth. As Prof. Andrzej Sławiński, the Director of the Economic Institute of NBP, noted during the presentation, a blot on the landscape was the fact that corporate investment is limited to replacement and upgrade investment. No new investment projects are started for fear of slowdown in the global economy.
“Our growth forecasts are slightly higher than the NBP projections that were developed under the assumptions of unchanged monetary and fiscal policies. We also assume that the economy will slow down a little bit in 2016 due to uncertainty in China and the timetable of spending EU funds in Poland. Regarding inflation, we assume that it may exceed 1.5 per cent by the end of next year,” says Piotr Kalisz, the chief economist at Citi Handlowy.
“We are more pessimistic than NBP economists, as we expect next year’s GDP to grow only by 3.1 per cent. We still see problems with growth in Europe, including in Germany after the VW diesel emissions scandal, and the emerging markets will continue to struggle. Overall, our forecast does not differ much, also in terms of GDP breakdown. Consumption and spending on infrastructure will play a key role. The labor market will also be doing well,” predicts Ernest Pytlarczyk, Chief Economist at mBank.
The NBP economists expect deflation to continue till the end of 2015. December may be the first month in which the inflation index will turn positive, but inflation in the whole year will close at -0.8 per cent, which will be the result of a sharp drop in oil prices and a high supply of agricultural products.
“Concerns about the economic growth outlook in the emerging economies, and in China, in particular” were cited during the presentation as the projection’s primary source of uncertainty. The impact of the slowdown in China on the global and Polish economies was elaborated in a separate box in the report.
It is true that China’s economy grew by a mere 7.3 per cent in 2014, compared to 8.8 per cent on average in 2009-2014 and even 10.7 per cent in 2001-2008. This matters because 16 per cent of global GDP is produced in China. China also accounts for 10 per cent and 12 per cent of global imports and exports, respectively.
The NBP economists reassure that, “the direct impact of China’s slowdown on GDP growth in Poland will probably be limited, considering the negligible share of China in Polish exports. In 2008-2014, exports of Polish goods to China rose by 10.4 per cent on average. Yet, these exports still make up a mere 1 per cent of Poland’s total exports, with only 13 per cent of Polish exporters selling goods to China. Exports to China are highly diversified and not particularly significant for hardly any sectors of the Polish economy. Furthermore, only large Polish enterprises with geographic diversification of their sales are present in the Chinese market.”
However, the indirect impact of the slowdown on Poland’s DGP growth may be greater. The slowdown in China may trigger the same reaction in Germany as the country is the main target market for Polish products manufactured under the global supply chains. The car industry, car parts industry and electronic industry could be hit most heavily. In addition, the decrease in commodity prices resulting from China’s lower purchases may “erode the profitability of the Polish mining industry, especially in the case of coal mining”.
The same decline in commodity prices would at the same time boost real disposable income of households and reduce production costs.
“A Chinese slowdown to 4-5 per cent of GDP growth alone will not pose a threat to Poland. China receives less Polish exports than Russia before the Ukraine crisis. Poland was hardly affected by the latter, and also in the event of negative developments in China, Poland’s economy would emerge unscathed. Obviously, I assume that China will not experience a very hard landing that could destabilize the financial markets and economies worldwide,” believes Piotr Kalisz.
“The threat arising from the Chinese economy is underestimated. The developments in China are ground-breaking, therefore a failed transition from production to consumption could have unimaginable implications for the euro/US dollar exchange rate or Germany’s terms of trade. On the other hand, the Polish economy is very sensitive to economic conditions in the euro area and would certainly be affected more severely than expected at the moment,” argues Ernest Pytlarczyk.