Tuesday, 25 October 2011

Mixed Economic Signals as New Crisis Looms

As Europe’s leaders seek to contain the ever growing economic crisis in the eurozone, the countries in Central-Eastern Europe (CEE) are holding their breath.

When the first wave of the economic crisis hit Europe in 2008, the economies of CEE were amongst the worst affected. Therefore, whilst the average rate of economic decline in 2009 was 4.3% in Western Europe, the EU economies in CEE fell by 8%.

Although such a dramatic economic downturn is not currently being predicted, all indicators point to a marked slowdown throughout CEE. The European Bank for Reconstruction and Development (EBRD) has drastically reduced its prediction for economic growth in all countries in the region for 2012: down from 3.5% to 1.7%.

With the outcome of the crisis in the eurozone countries still uncertain, and the possibility of a new double dip recession in Europe a real possibility, then this prediction may be over optimistic.

Whatever happens, it is clear that a region struggling to emerge from a severe economic crisis is facing more turbulent times ahead.

Poland is still predicted to be one of the region’s best performing economies, with its estimated growth for 2012 cut from 3.5% to 2.2%. In the wake of the recent elections – when politicians begin turning their attention to realities rather than fantasies – the signals coming out of the Polish economy are mixed.

Despite the negative economic climate in Europe retail sales have remained strong, growing at an annual rate of 7.1% in the third quarter of this year. Industrial production has also continued to grow, rising by 4.1% in the third quarter of 2011. Will it be possible to maintain this course of positive economic growth?

Leaving aside events in the eurozone economies, it should be expected that the government led investment drive in the country’s infrastructure will continue at least until the Euro football championships in June 2012. Thereafter, the ability of the government to continue its course of public led investment will be decided by its own budget situation and the willingness of the richer EU states to contribute to the EU’s next budget, due to come into force in 2014.

More immediately there are worrying signs about whether the growth in domestic consumption can be maintained. Firstly, it seems that the error committed in the Western capitalist countries – of expanding an unsustainable credit bubble to drive economic growth – is in danger of being repeated in Poland.

During the past two yeas the number of Poles who have problems paying their bills and meeing their credit payments has risen by 25%. 2.08m Poles have difficulties with their credit payments, with the average debtor owing nearly 10,000 zloty. Overall private debt has now reached a total of 32.4bn zloty in Poland. With the possibility of a new banking crisis breaking out in Europe these are disturbing figures.

Another negative development in the Polish economy is the slowdown in the labour market. According to the Polish Statistics Agency (GUS) in September alone the number of jobs declined by 5,000 and employers have stopped creating new vacancies that could replace these. Whilst a year ago there were 18 unemployed people for each job vacancy, this has now risen to 27. In September this year unemployment stood at 11.7% (in absolute terms 1 862 800 people), which is likely to increase in the coming year. In such conditions, over the past year, those seeking work have reduced the average amount that they are prepared to accept as a monthly salary by 322 zloty. Such depressed wage demands will further eat into people’s consumption power, particularly as inflation currently stands at around 4.3%.

With the government facing a possible economic downturn it is already talking about revising its over optimistic budget for 2012, which it presented before the elections. The Finance Ministry predicted in this budget that economic growth would reach 4% in 2012 and that unemployment would be around 10%.

With the government determined to rapidly reduce its budget deficit, it is likely that it will embark on a new round of economic austerity. However – as shown by the experiences in other European countries – such a policy would only depress economic growth, thus placing further pressure upon the government’s finances.

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