FT REPORT - POLAND 2007: Fastest growth in a decade

FT REPORT - POLAND 2007: Fastest growth in a decade
By Stefan Wagstyl, Financial Times
Published: Dec 12, 2007


The first Chevrolet to be built in the European Union rolled off a Polish production line last month, the fruit of a joint venture between General Motors, the US brand owner, and UkrAVTO, the Ukrainian industrial group that controls the sprawling Warsaw factory where the car is assembled. The partners are investing to raise Aveo production to 100,000 by 2009 and make some modest increases in the plant's 2,600 staff. Janusz Wozniak, the president of the FSO plant, said at the launch: "The start of production of the Chevrolet Aveo is the start of a new era at the FSO plant."

It is also typical of the foreign investment pouring into Poland. With many multinationals already established, there are fewer big greenfield projects than in the past. Foreign companies are focusing instead on broadening and deepening their existing operations. The capital inflow may lack the headline-making billion euro schemes of past years but it is even stronger than expected when Poland joined the EU in 2004. The authorities forecast foreign direct investment in 2007 to exceed last year's record €15bn. The FDI figure is just one sign of the strength of the economy the new government is inheriting. Poland is witnessing its fastest economic growth surge in a decade, with gross domestic product set to rise by about 6.5 per cent this year.

The main driver is domestic demand with Polish consumers spending money as never before, while companies are expanding investment at nearly 20 per cent a year. Construction is booming, as are consumer services from drycleaners to travel agencies. Wages are rising quickly and employers are clamouring for workers. Unemployment has fallen from 20 per cent just before EU accession to 11 per cent. While about half the decline has come through emigration, the rest has been achieved through domestic job creation. As Jeremi Mordasewicz, economic adviser at Lewiatan, the employers' organisation, says: "The economy is in good condition. Wages are growing strongly, but so are employers' profits."

The consumer boom is sucking in imports in increasing volumes, but exports have been growing at healthy rate of 15 per cent annually over the past three years. The current account deficit has opened up a little to a likely year-end figure of about 3.8 per cent. But this is easily covered by FDI inflows. Lewiatan expects 2008 to be another strong year, not least with a business-friendly government in power, following Jaroslaw Kaczynski's somewhat hostile administration.

However, there are some clouds on the horizon. As Ryszard Petru, chief economist at BPH bank, says: "In 2007, the surprises were positive [in the form of higher-than-expected growth]. In 2008 they could be negative." One potential threat is the global credit squeeze.

Dariusz Filar, a member of the Polish central bank's monetary policy committee, says the financial turmoil has had "no real impact" on Poland - beyond a slight increase in banks' international borrowing costs. Polish economists also take comfort from the fact that GDP growth is led by domestic demand, not exports, so the effects of a slowdown in western Europe, Poland's main market, would be smaller than in the past. And yet, as one senior banker says: "I think people in Warsaw need to pay more attention to what is going on in the world. I am afraid of what might happen if the financial problems in the US have a bigger effect in Europe."

The Polish economy also has some problems of its own - chiefly the danger of over-heating. Capacity utilisation is estimated at nearly 90 per cent. While the latest headline consumer inflation rate is low at 2.2 per cent year-on-year in the third quarter, it is creeping higher and has prompted the central bank to raise its basic interest rate in stages by 100 basis points to 5 per cent, with perhaps another 50 basis points to come.

While rising food and energy prices are playing a role, the national bank's main concern is wages, which are increasing at an accelerating rate - 11 per cent year-on-year in October, the latest month for which there is data. With an estimated 2m Poles working abroad, employers are struggling for staff with key skills, including engineers, building workers and marketing managers. Mr Filar says: "The labour market is tight and will increase in tightness in 2008 and over the next few years." For the government, this puts pressure on public sector pay. But, as Donald Tusk, the prime minister, says, rising wages are good news for many low-earning Poles. "The lack of labour in Poland is a problem in some niches, but I also want to look at it from the view of wage earners."

Meanwhile, credit has been growing rapidly, particularly consumer credit, which is forecast to rise by about 33 per cent this year, following a similar rise last year. Economists say that, with household borrowings still low in proportion to GDP, there is plenty of scope for further increases. But credit has fuelled demand growth, notably in housing, driving up property prices in big cities to levels which might prove hard to sustain if the economy falters.

With interest rates rising and some slight tremors in financial markets, the economy is slowing slightly, with economists forecasting a GDP growth rate of about 5.5 per cent for 2008. But they see no evidence for a dramatic decline in the growth rate thereafter.

They point to five main economic drivers.

These are strong investment, including that from abroad: the big increase in EU aid that came with accession but has yet to start flowing in earnest: the heavy boost to infrastructure spending that Brussels will help finance (including expenditure linked to hosting the 2012 European football championships); rising employment and wages as the current cohort of young people in their 20s, constituting a demographic bulge, are absorbed into the economy; and the growing contribution of migrant workers bringing money home.

Jacek Rostowski, finance minister, sees every reason for optimism: "There is no question that the Polish economy will continue to catch up to the economies of western Europe with growth rates that will be significantly above the growth rates in those economies."

However, he has some concern about the international financial markets, saying: "Everyone is aware that the next year could be somewhat fraught in the world economy."