No Escape From 3% Growth After ‘Dismal’ Flop for Polish Economy

  • Retail sales, construction miss forecasts, industry contracts
  • Zloty weakens on data as derivatives show more rate-cut bets

What passed for a fleeting lapse is becoming Poland’s new normal.

QuickTake Poland’s Populist Turn

With the government still saying growth is poised to pick up in the second half after lackluster readings of near 3 percent in the first six months, data published Thursday showed the economy at a standstill or worse. Retail sales and construction for July missed analysts’ forecasts, with industrial output unexpectedly contracting for the first time in almost two years. Instead of accelerating, the figures show gains in gross domestic product “slowing sharply” to about 2.5 percent at the start of the third quarter, according to Capital Economics Ltd. in London.

An economy staggering to growth it hasn’t seen since 2013 would be concern enough. But in Poland, the risk is that a slowdown will spill over into a budget crisis because the government needs a stronger economy to squeeze out more revenue to finance an ambitious social spending program. It’s already edging closer to the European Union’s deficit limit of 3 percent of GDP, threatening the flow of 82.5 billion euros ($93.7 billion) in funds earmarked by the bloc through 2020.

“With such a dismal start, acceleration in the second half is going to be hard to achieve,” MBank SA economists including Ernest Pytlarczyk said in a report. “Without EU funds and even with the support of a strong labor market and additional transfers from the government, the economy is unable to escape 3 percent growth.”

A weaker expansion may also pile pressure on the central bank to cut short its “wait-and-see” stance on interest rates and reduce the official cost of borrowing from a record low 1.5 percent. The zloty weakened and traders stepped up bets on rate cuts after the data were published on Thursday.

While distorted by fewer working days, industrial production slumped the most since 2012 in July and retail sales grew at the slowest pace in four months, according to data published by the Central Statistics Office. A preliminary reading for second-quarter GDP published last week showed a gain of 3.1 percent, missing estimates for 3.3 growth and barely improving on the first three months, when output rose 3 percent.

The government is seeking to maintain economic growth of at least 3.8 percent this year and next after GDP jumped 4.3 percent in the final three months of 2015.

‘Weak Start’

“This is a weak start to the third quarter, which for now will have more impact for the Finance Ministry than the central bank,” Jaroslaw Janecki, chief economist at Societe Generale SA in Warsaw, said by phone. “The ministry will need to be more conservative in its economic assumptions for next year.”

Industrial output in July fell 3.4 percent from a year earlier, worse than every forecast in a Bloomberg survey of 24 economists, whose median was for a gain of 0.9 percent. Retail sales added 2 percent, lagging the 3.4 percent median estimate. Construction plunged almost 19 percent.

“A deep slowdown in the construction sector has become more permanent than we had expected, limiting the chances for a quick rebound of the investment dynamics in the third quarter,” Bank Gospodarstwa Krajowego economists led by Tomasz Kaczor said in an e-mailed note. The slump among builders “is related to a standstill in EU aid projects, and low output for the construction industry is the main reason of today’s disappointment.”

Poland’s $475 billion economy is struggling to accelerate even after the government unveiled the nation’s most generous program of social benefits ever. It’s forecast to dole out 17 billion zloty ($4.5 billion), equivalent to about 1 percent of gross domestic product, to families with more than one child this year alone.

Costly Welfare

With the fiscal burden set to grow next year, public finances are stretched. Moody’s Investors Service mentioned budget risks in May when it cut the outlook on Poland’s A2 investment-grade rating to negative.

Poland’s Development Ministry this week revised its full-year GDP forecast to 3.5 percent from 3.8 percent as Andrzej Rzonca, a former member of the central bank’s Monetary Policy Council, said the government was looking at the economy through “rose-colored glasses.”

“The underlying trend seems to be towards weaker growth,” William Jackson, a senior emerging-markets analyst at Capital Economics, said in a research note. “The consensus view that growth will remain well above 3 percent over the next few years is looking too optimistic.”

Currency, FRAs

The zloty reversed gains against the euro after the industry and retail data, trading little changed on Thursday in Warsaw. Forward-rate agreements, derivatives used to bet on interest rates, showed expectations for 20 basis points in cuts over the next six months, the most since April.

Interest rates have remained on hold since March 2015 even as deflation is set to extend into a third year. The new central bank governor, Adam Glapinski, has said that keeping borrowing costs stable is the “right move” for the time being.

The economic setbacks to start the quarter may give the rate-setting council pause.

With no “overheating” in sight, inflation is “still close to zero in the medium term,” MBank economists said. “Therefore, the MPC’s rhetoric seems to be ill-suited to the current reality.”

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