Sunday, 24 February 2013

Lean times...

How come during the first wave of the crisis (I still assume economic misery lasting since 2008 would only ease, not cease) Poland was a “green island” on the map of Europe, while these days, although Polish economy does not, and predictably will not, contract, there are several CEE countries that outpace Poland in terms of GDP growth. How come? In my view there are two factors that contribute to relative frailty of the Polish economy. First is the strength of the Polish currency, the other is dwindling consumer confidence.

The former can be easily quantified and its impact on growth can be explicated with referring to currency regimes. Currencies of countries severely hit by the economic woes in late 2008 and 2009 were pegged to EUR (Baltic States), or these countries had just adopted the single currency (Slovakia). Polish zloty was then allowed to float and speculators betting against our currency sold it off  to levels which considerably boosted competitiveness of Polish exports and decreased demand on foreign products. Today PLN is fairly valued against other currencies and so Poland cannot fully benefit from advantages of cheap domestic currency.

The latter is less measurable (although you can always work out several indices or ratios to quantify optimism among consumers or entrepreneurs), it is more about collective state of mind and expectations. In 2009 Poles would rush to the shops as if economic slowdown was just a newspaper headline. Retail sales were rising, not soaring, but most Poles stayed optimistic about the future.

These days confidence is shrinking. Consumer feel much more insecure about the future and their salaries in real terms have dropped, while basic costs of living keep going up. Whenever we spend more to meet our basic needs (dwelling maintenance, food) and our income does not rise, we are forced to save on something else. And so we cut back expenses on culture, entertainment, going out, holidays, cars, etc. Plus when we feel insecure about the future, especially about the terms of our employment, we tend to put aside money for a rainy day. This is all visible around…

Just over the recent week Gazeta Wyborcza published two pieces on this trend. The first says fear of being fired is worse than joblessness. From the economic point of view it is better to have the job, than to be out on the limb, but from psychological point of view, the former state, combined with insecurity about tomorrow appears more crippling. Once you are jobless, your situation seems controllable. When, just like me, you have a job, but at the back of your head you have the thought that each day you go to work might be your last day there (I’m still better off because I have a generous severance pay guaranteed!), it is much more crippling emotionally. How can you plan anything? How can you decide to take out a loan if your repayment capacity might be jeopardised? How can you spend more, if a natural reaction in such situation is building a cash buffer? A human needs some stability, while today’s economy cannot offer it.

The second article dwells on general trend on the labour market – employment is falling, salary hikes are frozen, employees hold down the job, and, fearing of losing the job, expend less. This has severe implications for the total economy and becomes a self-fulfilling prophecy: consumers spend less, aggregate demand falls, producers put out less, needs fewer staff, lay off, those laid-off buy less and so the vicious circle keeps turning. Private consumption is the propeller of GDP and drop in it, compounded by limitations in offsetting it by other components of GDP (private investment, government spending, net exports), is quickly reflected in economic growth statistics. Also the current disinflation, despite its unsustainable character (1.7% y/y inflation in January was caused by temporarily cheaper fuels and drop in natural gas rates for households – do not cut interest rates so rashly!), is also the aftermath of lower consumer spending.

Skimping on every step is not just a figment of panicking journalists’ imagination. I can see it around, but not everyone is cutting down on splurging money. Fewer people buy coffee in the morning in our canteen (5 PLN per mug each day, giving it up leaves 100 PLN in your pocket each month), more prepare instant coffee, paid by the employer. I find it harder to find company for a lunch, as more people bring food from home. If they decide to eat out, they prefer our subsidised canteen to more expensive eateries in the vicinity of our office. Prices above 15 PLN for main course (without a soup) are prohibitive for Poles all ranking among 5% best-earning ones. Many decide to eat only a soup… They see merits of shoes bought in Deichmann or CCC, when choosing their holiday destinations, they seek cheaper places. Polish countryside is again an option, with agro-tourism being far less costly than mountain or seaside posh resorts. If abroad, Bulgaria, Hungary and Albania are all the rage, offering much cheaper accommodation that Mediterranean countries. Colleagues who have returned from winter holidays say lodgings and borrowing skis are much cheaper and despite this there are fewer tourists. Zakopane was all desolated as prices of rooms and in restaurants were far too steep (50 PLN for a lunch for one person is a daylight robbery indeed!). Going to a cinema – not more often than once a month, to a theatre – once in a quarter – restraints on spending on culture are quite typical. Car or public transport – the latter quite often wins. Traffic density and number of cars covered by snow for an extended period are respectively: lower and higher this winter. Traffic jams are not as bad as they use to be... No wonder if many people have given up on their cars.

Maybe what are just observing is just the farewell to credit-fuelled growth and onset of era of frugality. Number of new mortgages granted by banks in 2013 might be record-low, this will surely have implications for the property market, i.e. accelerate process of adjusting prices to purchasing power of buyers. There is one more time bomb ticking and I have not heard anyone’s concern about it in Poland – there is a property bubble swelling in Switzerland and the country’s central bank might be likely to raise interest rates. This might in turn hit mortgage debtors in Poland with their liabilities denominated in CHF, as amount of monthly instalment is much more sensitive to interest rate than to exchange rate. I am not envisaging spectacular bankruptcies of distressed borrowers, bad debts will not soar. Instead “home-owners” will be bending over backwards to make ends meet and avoid foreclosures even harder and this will also decrease private consumption.

The upbeat part of the post is, again, that property prices should be heading down…

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