Macroeconomics: Investment is key to growth in 2017

Polish GDP growth disappointed in the second part of 2016, but could increase slightly this year.

According to Polityka Insight’s forecasts the growth rate will top at 3.4 percent in Q3 2017 and then return to below 3 percent, averaging out at 3.1 percent compared to 2.7 percent in 2016.

Falling investment outlays, lacklustre consumption growth – despite a spike in household incomes connected to the 500+ plus programme – and no contribution to growth from the external sector led to an economic slowdown from 4.3 percent GDP growth in Q4 2015 to 2.5 percent in Q3 2016. The gloomy picture was only slightly more colourful thanks to better-than-expected data for the last quarter of 2016 – the flash reading showed a slight uptick in GDP growth to 2.7 percent, most likely thanks to a rebound in investment dynamics and a larger Christmas spending spree.

Economic sentiment should continue to improve throughout 2017, but GDP will accelerate only marginally. There is, however, large uncertainty about the exact pattern of GDP growth in the forthcoming quarters due to a high dependence of economic sentiment on the timing of EU funds disbursement, which will have an influence both on public and private investment outlays.

Most important for economic growth will be the start of the government’s infrastructural projects managed at the central level, like construction of new roads and railway maintenance. This type of public investment causes a positive demand increase for construction and many manufacturing companies. As a result these firms also extend their capital formation spending and increase their labour demand in order to have a larger production capacity. This multiplier effect gives a big push to the economy. According to government declarations, this year infrastructural investment outlays should amount to a similar level as in 2016 with a tendency to increase in the second half of the year. However, these declarations need to be treated with caution, as the government might experience some further delays in disbursing EU funds, due to larger red-tape obligations than in the previous budget perspective and more scrutiny inside public agencies that deal with large infrastructure projects.

EU funds also matter for investment by large private companies and local government units. The former are awaiting the start of tenders for EU funded projects with ready-to-implement investment strategies. This is especially the case in 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, at the same time refineries are willing to increase their petrol production capacity. The lowest eagerness to invest is among small and medium enterprises, which – despite a large financial cushion – are afraid of the increasing uncertainty. They fear more frequent administrative controls, a higher tax burden and unstable demand due to the switch in government economic policy.

The second, much more predictable factor that will boost economic growth in 2017, is private consumption. Coming as a surprise to many economists, households decided to save a large share of the child-benefit transfer, especially through reducing their outstanding debt in the form of consumer credit and payday loans. Another part of the PLN 17 bn transferred to households had been parked in saving accounts, increasing households financial safety nets. As a result, only up to one-third of the benefits were spent on consumption, and this mainly in the last quarter of 2016, when households decided to increase their expenditure on educational and recreational services with the beginning of the school year. Also, some households decided to spend a share of the 500+ government payout to buy more Christmas presents and groceries.

In 2017 and 2018 we will see the delayed effects of the 500+ programme, as households decrease their propensity to save to their initial levels and taking up more short-term loans for consumption purposes. This consumption-growth smoothing will bring a positive contribution to GDP growth for a longer period, boosting consumption even after the higher income dynamics fade out. Furthermore, in the forthcoming quarters, private spending will also be driven by higher wage growth, all-time-high consumer sentiment and a falling unemployment rate. Summing up, consumption will be the second most important driver of economic growth.

Despite solid growth in exports, the external sector will drag on GDP due to accelerating demand for foreign goods. An increase in investment activity, especially larger outlays on equipment, will boost imports, as many capital goods used in Polish companies are made in eurozone countries, or even outside the EU. Also, a further uptick in consumption, together with a largely constant EUR-PLN exchange rate, will also support imports. Hence, after a couple of years of improvement in Poland’s trade balance, 2017 might see a slight deterioration in net exports.

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).

February 10, 2017
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Written by: Adam Czerniak