The Polish Economy

The Polish economy signals excellent prospects for property investors

12 January 2006

We all recall the phrase, 'It's the economy, stupid', made famous during one of Bill Clinton's presidential campaigns.

And the truth if this phrase certainly applies when assessing the prospects for a property market.

In this regard, Poland looks set to experience strong growth in 2006 - even better than 2005.

The key here is that this growth is almost entirely driven by foreign investment coming into the country and exports.

Provisional data shows that FDI in 2005 may have exceeded $10 billion, according to the Polish Information and Foreign Investment Agency. This is a significant increase on the 2004 FDI level of $7.86 billion.

This investment is believed to have been responsible for directly creating 20,000 jobs in last year.

The Polish consumer, as we've reported previously, hasn't really learned to spend - unlike in several other new EU member states, notably Slovakia and Latvia, where the consumer is an important driver of economic growth.

When consumerism does take hold in Poland, as it inevitably will, we are likely to see even stronger growth for this key central European economy.

Most forecasts, including official Polish government ones, see Polish economic growth speeding up, not just in 2006, but beyond.

The evidence is already apparent.

The government's statistics office (GUS), reports that in Q3, 2005, GDP grew by 3.7%, against 2.8% in Q2. Most significantly, economic growth accelerated in Q4, 2005, taking growth for the whole 12 months up to 3.3%.

For an economy as large as Poland's - by far the largest of the eight new central European members of the EU - this represents strong growth.

Stronger growth in 2006...and beyond

The Polish Finance Ministry forecasts 4.3% GDP growth in '06, and Prime Minister Kazimierz Marcinkiewicz is reported as saying GDP could hit 5% this year.

The Finance Ministry sees investment growth climbing to a 8.7% this year, up significantly from 5.3% growth in 2005.

Inflation is forecast to average a benign 1.5% in '06. The Gdansk Institute for Market Economics is even more bullish on the prospects for the Polish economy, as reported in the Warsaw Voice. The institute predicts 2006 GDP will climb at a rate of 4.5%, and then accelerate further in 2007 - up to 5%.

Industry will be the fastest growing sector this year, increasing capacity by 6.8%. Service industries are also expected to grow by over 4% this year, with 2007 being marked by strong growth in the construction and industry.

The Institute believes that consumer demand will continue to lag GDP growth fro some time. Investment is expected to grow by 8% in '06, up from 5% growth in '05, and it is forecast to increase further, by 9.5%, in '07.

The rosy economic outlook is already reflected in the strength of the zloty, which most observers believe will make further gains over the next 12 months, and in the performance of Warsaw's bourse.

Interest rate cuts - a near certainty

Property Secrets believes is unlikely that the government will let the zloty appreciate much more, however, or, indeed, let it remain at its current strong level, as this will hurt exports. This means a likely cut in interest rates by the Polish central bank, stimulating consumer borrowing and, of course, mortgage borrowing.

The Prime Minister has already stated his position and wants to see a rate cut by the central bank at the earliest opportunity.

'I am convinced that a zloty between 3.9 and 4.0 to euro would be much better for economy," Marcinkiewicz told a news conference on Monday (Jan 9).

'All macro indicators since our government was created are better and better,' the PM said. 'We have a nearly unending boom on the Warsaw Stock Exchange, we have a low budget deficit, we have inflation falling below 1% and we have a strengthening zloty.

But the strong zloty will hit Poland's main engine of growth - exports, the PM added. The zloty- Euro rate on Jan 10 was €1 = PLN3.78. £1 was worth PLN5.54. Of course, as most Poles -and foreign property investors - take out mortgages in Swiss francs because of the much lower interest rates, a strong zloty relative to the franc does make servicing the mortage cheaper.

The stock market also reflects Poland's general economic health. The President of the Warsaw Stock Exchange, Wieslaw Rozlucki , is reported as believing 2006 could set new stock indices records as investors gain in confidence due to the solidity of the Polish economy.

'The Polish economy is growing faster than we expected,' Rozlucki said. 'Integration with the single European market has proven to be better and enterprises have been more competitive than expected. This translates into their performance, which, in turn, is reflected by the prices on the trading floor.

'In my opinion, all this shows that the economic foundations are strong.'

Eurozone prospects are key

Of course, even before membership of the EU in 2004, Poland's economy had become increasingly tied to that of the more established EU15.

Following EU membership, that economic relationship has become even more close. The economic health of the EU as a whole then, and especially the leading members of the Eurozone - especially Germany - are vital to Polish interests.

And here too, the prospects for 2006 appear to be increasingly optimistic.

The European Central Bank president, Jean-Claude Trichet, was widely felt to be alluding to the Eurozone's outlook when he talked about the world economy on January 9.

Mr Trichet forecast that global growth in 2006 would exceed last year's 4%. While the ECB is unlikely to raise the Euro base rate immediately, following the quarter point rise in December to 2.25%, this view of stronger growth is likely to mean a higher base rate later in the year, may be by as much as 0.5% before the end of the first quarter.

As long as there is no sustained rise in Euro base rates (which is highly unlikely), this will be healthy for the Euro economy and signal it has moved out of its sustained period of sluggishness.

This will in turn be excellent news for Poland - more confidence in the Eurozone will almost certainly mean an expansion of investment plans into Poland, already by far the biggest recipient of FDI among the central and eastern European EU members.

And more FDI means more growth in the employment market - and the link between employment growth and rising capital growth in the property market is unquestionable. Already Poland ranks extremely highly among foreign investors.

17% of those surveyed by consultants Ernst & Young cited Poland as the most attractive destination for new investment.

This placed Poland fourth in the world.

This puts Poland ahead of the three previously most attractive investment targets in Europe - Germany, Britain and France - and makes it Europe's most favoured investment location in terms of attractiveness.

In terms of investors' view of the potential for improved productivity, only the UK led Poland in the survey.