A boom in construction will drive the economy throughout 2018
Polish GDP is growing at a very solid pace of around 4%. Now, the main driver is consumption, accounting for three quarters of the increase and growing at a rate not seen since the global financial crisis.
Aside from consumption, only an increase in companies’ inventories is fuelling economic growth. In Q2 2017, firms increased their stock of goods and materials by 23bn zł, the highest figure on record and almost twice as high as the next highest reading. This is caused as companies prepare for a switch in GDP growth engines in the forthcoming quarters.
Government’s infrastructure projects
According to Polityka Insight’s forecasts, economic conditions in Poland will remain favorable and the GDP growth rate will fluctuate at around 4% until the end of 2018, with a peak at almost 4.5% in Q1 2018. However, there will be a large change from consumption-led to investment-led growth as household spending gradually slows down due to the fading impact of the 500+ child-benefit programme, which boosted disposable income growth and stimulated consumption from the second half of 2016. However, consumption growth won’t vanish altogether due to wage growth, which will further accelerate. Together with very good consumer sentiment, this will support an increase in household spending.
Most important for economic growth in the coming quarters will be the start of the government’s infrastructure projects, such as construction of new roads, railway maintenance or construction of municipal buildings. In Q2 2017, a lot of new projects came into the construction phase while numerous new contracts with construction companies were signed.
According to government declarations this year, infrastructure investment outlays should amount to a similar level as in 2016 but the majority of them will be concentrated in the second part of the year, boosting growth dynamics in Q3 and Q4. This is indicated by the pattern of how EU funding contracts were signed: according to EU data, there was an increase in the volume of contracts in the middle of 2016 and an acceleration towards the end of the year.
Taking into account the 15 month lag between signing an EU funding contract and the disbursement of funds to the real economy, one can expect public investment to surge on the verge of 2018. This effect may be slightly delayed if the government experiences trouble in disbursing EU funds because of increased red tape or more scrutiny inside public infrastructure agencies.
EU funds are also important for large private companies; however, they are still awaiting the start of tenders for EU funded projects with ready-to-implement investment strategies. Most likely, many submissions will be made in the Autumn and will translate into an increase in private investment throughout 2018.
This is especially the case for the ICT sector, where companies have plans to improve their broadband internet infrastructure with the use of external funding. Large investment projects are also on the table in the energy sector – electricity producers are planning new power plants and an extension of their energy grid, while, at the same time, refineries are willing to increase their petrol production capacity.
Companies are not increasing investment
The forthcoming increase in private investment would be bigger, if not for the lack of interest from many manufacturing enterprises in increasing their production capacity. According to data from July, the capacity utilisation in the industrial sector exceeded 80% and stood at its highest level to date, even though output growth was much slower than during the 2006-2007 boom period.
The reluctance of firms to increase their investment can be attributed to several factors, of which two are most noteworthy. Firstly, a lot of companies are afraid of changes in government economic policy, especially with regards to increasing the efficacy of tax collection. They fear more frequent administrative controls, a higher tax burden and more red tape obligations which will alter the cost-benefit analysis of investment projects and require a higher savings cushion in case of temporary losses.
Secondly, employers are experiencing increasing problems with labour shortages. These will eventually lead to an increase in salaries and pose a second risk to infrastructure projects, which may become unprofitable as increased production capacity cannot be provided without an increase in employment.
The economic growth will also be boosted by housing investment as households are increasingly taking mortgages to buy new properties. The growth in new residential projects is at its highest levels ever, even surpassing the boom years of 2007 to 2009. Moreover, a large slice of the inventories increase observed in Q2 2017 can be attributed to residential developments under construction, which will be finished and sold on the primary market in late Autumn or early Spring. Some of those forthcoming housing investments will be financed by cash, as falling interest rates provide incentives for savers to withdraw money from their deposits accounts and search for alternative investment opportunities.
All of these factors will boost the value added by the construction sector, which will be the fastest growing section of the whole economy. Already in Q3 2017, it will reach a double-digit growth rate and peak at the beginning of 2018. Moreover, such favourable business conditions will cause a multiplier effect as many construction companies will increase their spending both on intermediate and capital goods, which in turn will support a solid growth of manufacturing firms and further improve labour market conditions.
Adam Czerniak, Chief economist at Polityka Insight, where he heads the macroeconomic desk and conducts tailored research on wealth, consumers and the housing market. Czerniak is also assistant professor at the Warsaw School of Economics (SGH).