Half-year musings on economy

Late June. The time of year when days are the longest and it is a shame to stay indoors while the sunlight is out until 9 p.m. or later. After nine hours spent in the office and some household chores, there are still two hours left to enjoy the beginning of the summer.

On Wednesday I went to a swimming pool, for the first time since ages not during the weekend (few people had the same idea), on Thursday I took a bike and rode over 30 kilometres, making ac circle around Chopin Airport, which in a decade might be non-operational if idiotic plans of building a giant transport hub half-way between Warsaw and Łódź are carried through. The ride was a good time to ponder on the current state of economy, on macro and micro level.

The press reports say despite the rising crude oil prices, summer of 2018 will go down as the time of cheap airplane tickets. Checked out some offers at Wizzair’s webpage to learn the prices are indeed quite attractive. As it can be witnessed, tight competition exerts pressure on margins, which in the long run will not be beneficial for travellers. The weaker airlines might not withstand the price war and might easily go under or be taken over by stronger competitors. With fewer flight operators on the market, competitive pressure can ease and the era of low prices might draw to a close. On the other hand, prophets of doom have outlined such scenarios for many years and despite some bankruptcies cheap flight are still easy to find.

Although for nearly four years I have kept my savings away from the stock market, nor even investment funds, I recently began to keep track of stock market performance. WIG, the broad-market index of the Warsaw Stock Exchange on Thursday was 19% down from its peak reached in the third decade of January 2018. It rebounded on Friday, but the 5-month rate of return is below -17%. After one or two trading days marked with red colour, the broad-market index can enter the territory of bear market (20% decline from peak). Several factors bring stock prices down: fear of trade wars (say thank you to the insane president), fears of global economic slowdown, but also imminent lower GDP growth dynamics in Poland, as the peak is by all accounts behind.

I cycled past the recently built housing estates in Mordor and near ul. Kłobucka within the borders of Ursynów. New blocks of flats are erected between recently built ones. Proximity of the airport, S79 expressway, railway tracks, prison and old warehouses, lack of decent infrastructure and public transport links, high density of development are crucial downsides of that location, but despite that flats are selling like hot cakes out there, even before construction commences. Second-hand (nearly new) flats in the area have asking prices in the range of PLN 10-12k, same as in areas of Ursynów superbly linked to the city centre by underground. Nevertheless, data from residential primary market show 2% q/q and 2% y/y decline on six biggest markets, shows the demand is not infinite and buyers are sensitive to price hike. On the other hand, the recent NBP report shows profit margin of developers have not shrunk despite rising costs of building materials and shortages of labour force.

Sales of brand-new automobiles still rise, but the growing supply of 3-4-year old used (mostly post-lease) cars constitutes an alternative to a purchase of a brand-new vehicle. Though I personally see several drawbacks of such cars, many people will go for a used cars which cost half (or less) of what they would have to pay to drive out of dealer’s showroom as first owners of a shiny vehicle. Car dealers’ sales targets are exorbitant, besides stocks of unsold cars are rising, so the tensions in among distributors begin to emerge.

Last week the central bank of Czech Republic jacked up interest rates for the fourth time in a year. Currently the benchmark rate is 1%, still 0.5 percentage points below the benchmark rate in Poland, yet it has to be noted the central bank of Poland’s southern neighbour is acting ahead of inflationary pressures and overheating economy and cools it down, while it is going strong and easily absorbs the higher cost of money.

Lessons from the crisis have not been learnt. I recently heard property prices in Denmark rose by 100% since 2012, so a classic bubble has emerged there. Reasons: firstly, negative interest rates, secondly, adjustable-rate (interest-only for up to 10 years) mortgages, in which a borrower pays only interest (laughably low), but principal repayments begin after 10 years. Such product, similar to toxic mortgages which a decade ago blew over the US economy and spilt worldwide, is a ticking time bomb, waiting to go off. Frotunately, in terms of mortgage lending regulatory constraints in Poland are far tighter and ward off a serious crisis.

One only ought to bear in mind nothing lasts forever. The business cycle theories still hold true and after a few years of boom time of growth deceleration ensues inevitably. This should be borne in mind and taken into account while taking forward-looking decisions.