Poland business outlook 2013-17 Quarterly update - January 2013 By Dr Daniel Thorniley.

Poland business outlook 2013-17

Quarterly update - January 2013By Dr Daniel Thorniley

Contents

• Executive summary • Poland has fared better than other countries...why?• Business outlook • Economic outlook• Budget deficit• Inflation and interest rates • Currency outlook• Statistical outlook 2010-17

Executive summary (1)

• Poland took quite a battering economically in the last months of 2012• Central Bank Governor calls it “perfect slowdown” while avoiding a slump…so far• GDP growth expectations have shrunk sharply for 2012 but more so for 2013• Global and regional trends are hurting Poland which started to shrink later than

other core CEE markets• Companies are downgrading business expectation for 2013 quite sharply• But Polish economic/business outlook still rates better than in CEE and SEE • Some 80% of foreign direct investment in the CEE region (excluding CIS) is directed

to Poland and Turkey• And Russia, Turkey and Poland account for 77% of CEE-CIS retail trade• Poland is one of the Big-3 with Russia and Turkey but has slipped behind Turkey as

a priority market


• But with other CEE and SEE markets clunking downwards, Poland stands out even more strongly in the CEE region

• Early in 2012 the consensus estimate for 2012 GDP growth was 2.9% but this now looks more likely to be 2.1%

• Poland now joins many markets which will see weaker growth in 2013 (at 1.6%) than in 2012

• Exports were negative in 2012 and could be flat or negative this year• The banking sector is in relatively very good shape• But new credits are falling sharply as the economy slows• On the plus side, the Polish authorities and Central Bank are NOT obsessed with

austerity programs


• Both the government and Bank have declared that they will mitigate or reverse existing austerity measures to keep economic growth on track

• Economic trends are strained but the government is not determined to make matters worse unlike many other CEE and global economies

• We except inflation to moderate on the back of the slowdown to 3.0% this year from 3.8% in 2012

• The country’s borrowing rates are at historic lows • The currency is stable and we predict a mild appreciation in 2013 but nothing too

exciting

Poland has fared better than other economies in CEE and across Europe—Why? (1)

• Well because Poland is very much like France! • In recent years there were indeed several economic similarities between the two

countries:1) Poland has a large domestic economy

2) Poland is less dependent on exports and trade. The proportion of GDP emanating from foreign trade is 72% in Slovakia, 70% in Hungary, 60% in Czech Republic and only 33% in Poland. So Poland was not so badly hit in the trade collapse of 2009

3) Remittances from abroad have been strong (though these are slowing)

4) Relatively strong banking sector less exposed to the derivatives crisis. New bank credit levels in Poland were among highest in Europe, growing at 12-14%, but these are slowing to 3-4%

Poland has fared better than other economies in CEE and across Europe—Why? (2)

5) Companies were and are sitting on cash. Polish companies survived the crisis quite well and built up their cash pile like everyone else. Weakening credit trends may actually be due to Polish companies being reluctant or not needing to take on new credits against a back-drop of slowing investment and a weaker Polish and European outlook

6) Investment for the UEFA football tournament was very positive but the economy is taking a cold shower now the event is over

7) Government has been less rigorous or obsessed with austerity programs of massive cuts to the economic fabric. The government and Central re-endorsed their anti-austerity credentails in 2012

Business outlook (1)

• Poland is experiencing a strong slowdown in sales expectations across all business sectors

• Until about 6-9 months ago, companies were still plunging into the market as one of the “growth survivor” markets along with Russia and Turkey

• But newcomers may be put off now by the tightness of the market• As in other markets, local champions are reviving and proving fierce competitors• Private equity has enjoyed good investments in this market as they targeted

Poland as a growth opportunity some 4-7 years ago• Some of these investors are jacking up profitability in order to divest and this

heightens pressures especially in consumer products and retail sector among others

• Poland used to be the No 2 priority market in the CEE region after Russia• But has now slipped into third spot behind Turkey with 30% of firms rating it as a

priority compared with 43% some 6 months ago


• This is a sharp drop but was probably inevitable as Poland matures and Turkey remains a fast-growth convergence market

• However, sales and profit trends have been damaged by the recent negative economic results in the last 4-6 months of 2012

• In terms of rate of growth in 2013 for organic sales Poland ranks No 11 among 23 markets which we survey

• This takes no account of the volume of sales and of course Poland still ranks as No 3 priority market in the region

• The key points, as we show below, are that: – expectations are coming down sharply – Poland is even more entrenched as a single-digit sales market – A growing number of companies expect flat growth in 2013


• In the middle of last year most executives across sectors foresaw steady single-digit growth mixed from 1% to 10% growth

• Nearly all consumer product and food & beverages firms expected 3-6% sales growth in 2013 with a good number though (20%) close to flat growth

• IT and pharmaceutical sectors stay marginally stronger than other sectors • But we have to state that these two sectors are also set to slow sharply in 2013

especially the IT industry• In our Survey conducted in December 2012 the outlook among executives has

worsened noticeably • Previously only 5% of companies foresaw flat or negative sales in 2013 whereas

now 20% of firms plan for this • And overall sales expectations for 2013 deteriorated


• This is of course a feature across most of the CEE region• CIS markets are now sticking out as the regional growth markets and in terms of

top-line organic sales growth core CEE is slumping badly• Poland remains the core CEE “winner” market• Despite being extremely tight and ultra-competitive• The point is that Poland is the key CEE core market and yet 20% of executives plan

no growth and fully 71% look for single-digit sales growth• The consumer products sectors is a tough one in Poland: tight, own label,

hypermarkets, downtrading etc• In our Survey not a single company anticipates double-digit sales growth in 2013

with only a quarter expecting to grow at more than 5% top line• Fully half of companies in this sector see sales rising 1-5% and another quarter

except no growth at all


• The regional head of one major US consumer product company commented last year:

“Poland is immensely tight and difficult: one of the most competitive markets in the world. It is by far the tightest market in the CEE region

and I think even more competitive than Moscow. The trends we have seen in terms of own label, discounting and downtrading have been remarkable. Regarding these trends, I think Poland has achieved in 18 months what it took Germany to do in 8 years. We stay in Poland of course, a key European market. But we know there will never again be fast growth and we have to treat the business and trade just like Germany. In our sector Poland has not been a “CEE” market for many years”

• The food and beverages sector is a little more diverse than overall consumer products with about 15% of firms looking to grow actually more than 10% top line in 2013 but the market is of course very tough


• The MD of one major European food giant stated just last month in Vienna: “Poland is a very large volume market for us and quite strategic in

Europe. It wobbled a bit in 2009 but survived better than nearly all European markets. And 2010-12 has been satisfactory with sales growth of 8%. But I expect to have to manage that down to 2-4% in 2013 and probably into 2014. The economy is clearly slowing down and consumers are reacting on discretionary food spend and looking for even cheaper prices”.

• The B2B sector is the toughest sector across the region and also in Poland • Financing was still good in 2011-12 unlike other markets but the credit slowdown

is now hurting industrial sales


• The local manager of one major US conglomerate commented in a phone interview this week that:

“Poland has been one of the better CEE markets for our company across the CEE region. We are still getting some good sales in the

auto sector in Hungary, Czech and Slovakia but Poland has been better in a more diverse way. This still only means top-line sales of 7-9% but on a good volume this wasn’t bad. I am seeing now though a slowdown in new bank credits and also some falling confidence in companies and in Polish consumers. We have to plan for a softer patch over the next 15 months”.


• Recent slower growth and an investment downturn has hurt the IT sector• The regional manager of one major US IT player stated in Warsaw in December:

“I am quite worried about Poland. Sales and trends in the last 4 months of 2012 were concerning. Poland has been and remains a key strategic

market for us and to undergo this level of slowdown in a few weeks is a major hit. The impact was rapid from about early September. We hope that it may turn around in second half of 2013”

• This executive is quite right to expect 6 tough months ahead• There are few economic factors which will help the market and in fact perhaps all

of 2013 could be a struggle in the IT sector

Business outlook (9 ) – features of business

• In terms of features of business we see the current trends:• In mid-2012 some 30% of executives thought they would be increasing headcount

in 2013• This proportion has dropped from 30% then to 14% now• A slowing economy simply means less hiring• And conversely a growing number of companies plan to reduce headcount: this is

by no means an epidemic but 13% of firms plan headcount reduction next year• This is enough to rank Poland No 3 in this category behind Hungary (24%) and

Czech Republic (15%)• Brutal headcount reduction is not planned in 2013 across the region probably

because some firings were already made in 2011 and 2012

Business outlook (10 ) – features of business

• In terms of cutting sales and marketing costs, again Poland ranks quite high (No 5) with 10% of companies planning this in 2013

• The figure is not higher because Poland ranks as a priority market and most firms know that they can’t cut too deeply in strategic markets if they want tor retain market share

• Poland does not rate highly among companies reviewing changes to route to market

• This is a neutral comment simply because most companies have already integrated their distribution system into pan-European ones or have developed local distribution which is long-standing

• In other words distribution is mature

Economic outlook (1) – GDP

• Instead of reaching 3% GDP growth in 2013-14, this is now postponed to a more likely 2015

• After growing 4.3% in 2011, we see GDP down to 2.1% last year• But the current indicators are so weak and with considerable follow-ons that we

predict GDP in 2013 to rise just 1.2%• The Polish government has revised its own figures to a range of 0.5% to 2.5% and

the IMF stick with an upbeat 1.75% but we expect the IMF to reduce that estimate• In fact if economic results at the turn of year do not improve, consensus forecast

could fall to below 1% while some commentators talk of a low of 0.5% this year• In other words our 1.2% estimate has all risks on the downside• GDP growth will then rise to 2.4% in 2014 presuming a mild Eurozone recovery or

continued avoidance of a collapse• The second quarter 2012 showed initial signs of economic slowdown and these

sharpened in third quarter

Economic outlook (2) – GDP

• Third-quarter growth year-on-year was a poor 1.4% and consumption was at an historic low while fixed investment fell by 1.5%

• Industrial output slowed to an average rate of -1.8% in November after a negative figure in September

• This compares with industrial growth at the start of 2012 of 8.8%• The automotive sector has been savaged during 2012 with output down almost

minus -20% in the first 10 months of last year• Generally it looks like the turn of the year 2012/13 will be exceptionally weak with

a good start to 2012 and perhaps some pick up at end of 2013• We predict therefore average industrial growth of 2.2% for 2012 and 2.6% in 2013

with downside risks

Economic outlook (3)

• Just as industry is down, so too investment has takena cold shower after the boom prior to the UEFA football tournament (and we see similar trends in Ukraine which co-hosted that event)

• Large new projects are unlikely to materialise until the next 7-year EU funding budget is finalized: the current budget cycle is 2007-13

• After jumping 9% in 2011 in the run up to the football tournament, we see fixed investment at zero in 2012 as the numbers went negative starting last spring

• Fixed investment will get few boosts this year and much will depend on eventual timing of EU funding projects so we only expect 2.5% expansion in 2014

• But then some steady recovery to 4.2% investment growth by 2015

Economic outlook (4)

• The current downturn is broad-based: in addition to slower growth in consumer spending, bank credits, industry and investment, trade is also shrinking badly

• After double-digit export growth in 2010 exports slumped to minus -7% last year and will only experience a mild pick-up this year of +2% depending on the extent of the weak Eurozone recovery

• Exports could trend negative even in 2013• On the plus side, after year-on-year figures in the red for most of 2012, exports

actually rose by 9% year-on-year in October 2012• It seems that even though Poland is relatively less exposed to exports (only 33% of

GDP compared with 70% in Hungary and 72% in Slovakia) the combination of negatives has been a perfect storm

Economic outlook (5) – bank credits

• Poland distinguished itself in 2010-11 and first half of 2012 with strong new credit emissions: loans to citizens and companies

• New loans were increasing at a rate of 14% end 2011, the highest level in CEE (excluding CIS)

• But new loan growth slowed to 7% in July 2011 --- still a good rate• In comparison Eurozone loans are negative or +1% and other CEE markets see new

credits rising at 2-3%• However, new loans slowed further to 3.4% in both September/October last year• If loans emissions remain at 2-4% level, this will at least act as some cushion for

GDP growth and consumer demand• But of course this level is and will feel a lot weaker than double-digit credit growth• There is also the threat that as confidence declines further, then fewer loans will

be taken out

Economic outlook (5) – consumer spending • With real wages sluggish and consumer confidence at low levels and likely to fall,

we are seeing and expect a noticeable slowdown in consumer spending• Just as GDP forecasts have declined steeply, so too with consumer spending • In just three months the consensus view for household spending in 2012 has fallen

from 1.8% to 0.8% and the figures for 2013 are for a fall from 2.0% to 1.0% • We then expect a slow/steady recovery but only back to 3% rate of household

spending to happen in 2016• Falling inflation in both 2012 and 2013 is one of the few positive factors affecting

consumption• Along with other consumption-related numbers, unemployment trends are not

looking good• Unemployment topped 13% last August and sat at 13.2% in November• We expect unemployment to average 12.7% in 2012 and to creep up to at least

13.0% this year

Economic outlook (6) - consumer indicators

• Consumer confidence indicators in Poland (-30) are not bad compared with other CEE markets which range at -35 to -50

• The current pan-EU confidence indicator is -27 so Poland is close to the (poor) European average

• The indicator has not moved much through the last year despite a mild improvement in spring 2012

• We presume that given all the bad economic news coming in, that unless the Eurozone and trade pick up, then consumer confidence indicators will probably weaken further in the next 6 months

Economic outlook (7) - retail trade

• Retail sales have followed consumer indicators downwards and closely tacked the slowing trend in bank credits

• Retail sales at the turn of 2011-12 were very strong and were expanding at 8.5% in the first quarter of last year

• But by summer 2012 the growth rate was down to 2.8% and the recent autumn figures were lower with the September figure actually negative for the first time in over two years

• We expect retail sales to have grown 3.5% in 2012 but this was entirely due to the strong start to that year

• Retail sales may slow to 1.2% this year and such slower growth has been factored in to consumer product company budgets

• 2013 will be the slow year for consumption and we then predict retail sales rising slowly to 2.3% in 2014

Economic outlook (8) - retail trade

• One factor slowing down consumption will be sluggish real wage developments• In recent years these were not especially strong given that workers could not price

themselves into the market due to high levels of unemployment• Even with inflation well under control, real wages are not rising because nominal

wages are weak• Real wages climbed just 1% in 2010 and barely 0.6% in 2011• In 2012 they sank to almost zero and will rise this year thanks to lower inflation to

just 0.5% and then rise slowly in the next 3-4 years• This shows that most consumption has been driven by either bank credit or

accumulated savings levels

Budget deficit (1)

• Poland is an exception when it comes to budget deficit management• The government was not obsessed with deficit reduction in 2009-10 unlike most other

CEE and global economies• This helped Poland to achieve top GDP growth spot in Europe in 2009 and to post

good GDP growth in 2010 and 2011• The deficit actually rose in 2010 to -7.9% but the government was nonchalant because

GDP growth was 3.9%• The deficit did fall to -5.1% in 2011 and we expect improvement to -3.5% in 2012• But the government will miss on the higher side its deficit targets for 2012 and 2013

when the deficits will remain above -3% at about -3.2%• Targets were missed because GDP growth estimates were too optimistic and the

government refused to engage in full expenditure cuts• Developments in 2012 were revealing of government and Bank thinking • After the last elections the government started to introduce austerity measures

Budget deficit (2)

• But as negative growth numbers came in, the government was the most responsive in Europe to back-track on austerity

• PM Tusk announced in October that government would grant to the state-owned bank BGK some privatisation revenues to fund infrastructure projects

• The Central Bank also reversed its incorrect spring interest rate hike• The Governor of the Central Bank, Marek Belka, commented in December:• “Budgetary consolidation is slowing which I hope will give economy a breathing

space. We are not encouraging the finance ministry to further excessive fiscal consolidation at this stage”

• Financial markets can live with Poland’s non-austerity approach as country’s borrowing costs are at record low levels

• The risk of budget overshoot is also alleviated by the fact that Poland covered its 2012 borrowing requirements and has already covered 20% of 2013 financing

• Government plans to issue Euro 4.7bn in foreign bonds this year with total issuance of about Euro 7bn

Inflation and interest rate outlook

• Inflation is trending down against the back-drop of the economic slowdown• Consumer prices slowed from 4.8% in December 2011 to 2.8% last November and

core inflation is down to 2.0%• We foresee further declines to 2.5% in February this year and 2.2% by spring 2013• Average inflation will reach 3.0% this year after 3.8% last year• The outlook is for inflation to average about 2.7% over the subsequent three years• Inflation is down due to lower food prices and base effects from a 2011 VAT hike • The Central Bank’s Monetary Policy Committee (MPC) raised interest rates in May

2012 by 0.25% and, as we predicted, quickly saw this as a mistake• The MPC is now back-tracking and made two rate cuts of 0.25% year-end 2012• The Governor of the Bank is on record last December arguing against austerity

cuts which would harm GDP growth • Key reference rate will fall another 0.25% to reach 4.0% and will stay there or fall

to 3.75% by spring this year; rates may rise a little by end of 2013

Currency outlook (1)

• After the spring 2012 “collapse” to 4.35 to the Euro, the zloty has traded in a stable band of 4.08 to 4.15 for the last 6-7 months

• Moderate improvements in the fiscal deficit and current account and public debt under control at 53-55% ought to ensure no sustainable downward jumps

• But we expect any appreciation to be moderate against what may be a mildly weakening Euro to the dollar

• The zloty has averaged against the Euro 4.12 in 2011 and close to 4.15 in both 2011-12

• We foresee a very small appreciation to 4.10 in 2013 and steady at that level in 2014

• Most commentators have over-rated the zloty in recent years and the markets have more often stayed away from the currency and hence the inability to break through 4.0

Currency outlook (2)

• In addition on the downside for the zloty will be the string of interest rate cuts which are underway and the rate of GDP slowdown will also worry the financial markets

• All in all, the pros and cons balance themselves out • And of course the Central Bank is able and active to enter the market with zloty

support when it feels the currency becomes too weak and an inflationary threat• Central Bank reserves of Euro 82bn suffice to do this• As ever, any further global slump would exacerbate risk aversion and the markets

would turn against many emerging market and CEE currencies including the zloty

Poland - Statistics 2011-17

2011 2012 2013 2014 2015 2016 2017GDP 4.3 2.1 1.2 2.3 3.3 3.5 3.8Fixed investment 9.0 0.0 1.0 2.5 4.2 5.0 5.0Industrial output 7.5 2.2 2.7 3.8 4.6 5.1 5.2Household spending 2.5 0.8 1.1 2.0 2.7 3.0 3.0Government spending -0.5 -0.8 0.3 0.6 0.6 0.7 0.7Real wages 0.6 0.1 0.5 0.7 1.1 1.5 1.8Retail sales (year-end) 8.5 3.5 1.2 2.3 2.8 3.5 3.5Consumer prices (average) 4.3 3.8 3.0 2.8 2.7 2.5 2.5Budget deficit (% GDP) -5.1 -3.5 -3.1 -2.9 -2.9 -2.8 -2.8Current account (% GDP) -4.3 -4.2 -4.0 -3.6 -3.6 -3.8 -3.3Exports 7.5 -4.0 1.6 4.4 6.8 8.1 7.8Imports 5.8 -3.0 0.8 3.9 5.8 7.0 6.8Zloty/Euro (average) 4.12 4.16 4.15 4.10 4.05 3.90 3.90Unemployment (%) 12.4 12.7 13.0 12.3 11.7 11.2 10.7Note: Real annual % change unless stated

Disclaimer, copyright, sources

© 2013 CEEMEA Business Group* *a joint venture betweenDT-Global Business Consulting GmbH, Address: Keinergasse 8/33, 1030 Vienna, Austria,Company registration: FN 331137t and GSA Global Success Advisors GmbH, Hoffeldstraße 5, 2522 Oberwaltersdorf, AustriaCompany registration: FN 331082k

Source: DT-Global Business Consulting GmbH and CEEMEA Business Group researchBasic data sources come from central banks, own intelligence network, CEEMEA Business Group corporate survey, governments and other public sources. Interpretation, views, forecasts, business quotes and business outlooks by DT-Global Business Consulting GmbH and CEEMEA Business Group.

This material is provided for information purposes only. It is not a recommendation or advice of any investment or commercial activity whatsoever. The CEEMEA Business Group accepts no liability for any commercial losses incurred by any party acting on information in these materials.

Contact: Dr Daniel Thorniley, President, DT-Global Business Consulting GmbHM: +43 676 534 685 / E: [email protected] / W: www.ceemeabusinessgroup.com

Poland business outlook 2013-17 Quarterly update - January 2013 By Dr Daniel Thorniley.

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Transcript of Poland business outlook 2013-17 Quarterly update - January 2013 By Dr Daniel Thorniley.