Bloomberg News

Polish Economy May Slow as Investment Lags Behind Forecasts

June 01, 2011

(Updates with interest rate expectations in ninth paragraph.)

June 1 (Bloomberg) -- Poland’s economic growth, which remained close to the fastest pace since 2008 in the first quarter, will probably slow as private investment lags behind economists’ expectations.

The European Union’s largest eastern economy expanded 4.4 percent from a year earlier in the first three months, boosted by rising private consumption and exports to countries including Germany, the Central Statistical Office in Warsaw said yesterday. Fixed investment rose 6 percent, missing the 10.8 percent median forecast of six economists polled by Bloomberg.

“While headline growth remains strong, its composition suggests this pace is unsustainable,” said Michal Dybula, chief economist at BNP Paribas in Warsaw. “Investment growth was surprisingly weak.”

Poland, the only EU nation to avoid recession in 2009, expects economic growth to accelerate to 4 percent this year from 3.8 percent in 2010, as domestic demand continues to strengthen. Companies such as furniture maker Nowy Styl Sp. z o.o. are less confident, putting off investments while they await signs of a sustained recovery.

Growth slowed for the first time in eight quarters in the first three months of the year. Gross domestic product expanded 4.5 percent in the final quarter of 2010, the fastest pace since the July-September period of 2008.

Government Spending

The government seeks to bolster growth by accelerating spending of EU development funds allocated for 2007-2013. Poland is also upgrading roads, airports, railways and stadiums in preparation for next year’s European soccer championships, which it will host with Ukraine.

It’s “realistic” to expect Poland’s economic expansion will exceed 4 percent in the second quarter, Janusz Witkowski, acting head of the Central Statistical Office, said today in an interview with TVN CNBC television.

“It should be kept in mind that the contribution of first- quarter investments to the annual result is relatively small, and the following quarters will be key for the pace of investment growth,” the Finance Ministry said yesterday in an e-mailed statement. “We don’t know yet how much companies contributed to first-quarter investment growth.”

Poland’s central bank has raised interest rates three times this year as it sought to curb inflation, which has exceeded the target for seven months, while avoiding “excessive” increases that would choke off investment. The bank boosted the benchmark rate by a quarter-point to 4.25 percent on May 11.

‘No Investment Boom’

Jerzy Hausner, a Monetary Policy Council member, said May 23 he expects “no investment boom” and that “the end of the monetary tightening process should be in sight.”

Investors in the derivatives market are betting there will be two more rate increases by the end of the year. The difference between six-month forward-rate agreements, used to fix borrowing costs in the future, and the three-month Warsaw interbank offered rate stands at 57 basis points. It was 45 basis points on May 11, the day of the last increase.

The zloty gained to 3.945 per euro as of 7:30 a.m. today in Warsaw from 3.9489 yesterday.

Polish companies with 10 or more workers increased investments by 2.6 percent in the first quarter. That shows most of the total was generated by public investments, said Monika Kurtek, chief economist at Bank Pocztowy in Warsaw.

“We still aren’t seeing the pickup in private investments” that the central bank is waiting for, she said.

Companies Suspend Projects

Nowy Styl Sp. z o.o., a Polish furniture maker, halted plans to build a 60 million-zloty ($22 million) production line this year due to “poor market sentiment,” Chief Executive Officer Adam Krzanowski said at a news conference in late April.

ES-System SA, a Warsaw-listed maker of lighting systems, suspended investment in a new plant in Dobczyce, southern Poland, because of lower-than-expected demand for solar panels in Europe, CEO Boguslaw Pilszeczek said at a news conference on May 12.

While Polish companies are expanding, they don’t want to invest yet, said Slawomir Sikora, chief executive at Bank Handlowy SA, a unit of Citigroup Inc. and Poland’s sixth-biggest bank by assets. Domestic entrepreneurs increased debt by 2.8 percent to 220.6 billion zloty in the first quarter, according to M3 money supply data from the central bank.

“These are mostly revolving loans for current operations,” Sikora said. “There’s no demand for investment loans while global uncertainty and problems in the euro zone are discouraging companies from long-term investments.”

-- Editors: Andrew Langley, Willy Morris

To contact the reporters on this story: Monika Rozlal in Warsaw mrozlal@bloomberg.net.

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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