RAIFFEISEN BANK S.A.

  |  2013-03-22

CEE Weekly Outlook: Polish investments suffering from post-Euro 2012 effect

CEE markets remained fairly resilient in the wake of the Cyprus crisis this week. Only traditional suspects like EUR/PLN and Russia suffered from the increase of its CDS spreads due to the bigger role in Cypriot banking. Political concerns in Hungary resulted in an outlook revision from stable to negative by S&P

This week economic data revealed further drops for larger CEE economies like Russia and Poland (where industry output fell simultaneously by 2.1% yoy). In Ukraine industrial output shrunk by 6% yoy and Croatia also reported a 2.7% y-o-y GDP decline for Q4 2012, putting the whole 2012 “growth” at minus 2%. So far weak high-frequency data in a large number of CEE economies confirm our earlier prediction of a sluggish recovery in the region - at least for H1 2012. At the same time Russia’s central bank decision to leave interest rates unchanged last week – as expected – did not reflect recent economic concerns. Weak consumption and output reports for Russia make us believe that the central bank will have to do carry out some easing in Q2 when inflation will drop.

 

Focus on: Polish investments suffering from post-Euro 2012 effect

 

In 2013, almost a year after the end of the Euro 2012 tournament, the Polish economy is struggling with a deep cyclical slowdown. The downturn in the domestic economy is largely driven by both weak consumption and disappointing investments. The strong downtrend in gross fixed capital formation raises the question to what extent this downturn is driven by post-Euro 2012 trends. Or in other words: to what extent is the sluggish investment growth observed in recent quarters determined by the high base effect from the end of 2011 and the beginning of 2012? A deeper analysis shows that a negative base effect severely dampened gross fixed capital formation growth at the end of 2012 and in the first months of 2013.

 

Later in 2013 this base effect should lose its relevance. The starting point for the analysis is to estimate the impulse of the preparations for Euro 2012 on the economy and then to stimulate economic growth and gross capital formation under the assumption that Poland was not the organizer. As a starting point of the analysis we used our standard macroeconomic forecasting tool for the Polish economy. The simulation was carried out for the years 2008- 2012 for two scenarios: without Euro 2012, and including investments related to organizing the tournament. All of the transportation expenditures were excluded from the analysis as they would have been incurred regardless of Euro 2012 organization.

 

 

The total value of extra-spending included in the analysis amounted to PLN 45 bn. The results indicate that because of the tournament organization, in the years 2008-2012, gross capital formation was higher by about PLN 55 bn – PLN 10 bn more than the incurred spending. This results from an interaction between investments and the other components of GDP, especially private consumption which created positive, secondary effects on gross capital formation.

 

However, large parts of the spending associated with the Euro 2012 tournament were incurred at a time when the Polish economy was growing at a pace above or close to its potential. It is for this reason that the overall increase in gross capital formation during this period was not much higher than the incurred expenses. The impact of the Euro 2012 on GDP is even lower. According to our simulations the “additional growth” of the economy in the years 2008-2012 amounted to about PLN 30 bn. These results confirm the relatively low efficiency of government spending in comparison with private investments. In this case, each zloty invested in Euro 2012 (in large part from EU funds) created 0.66 zloty of economic growth.

 

 

The simulations also show that from the year 2011 the annual growth of gross capital formation was significantly reduced by a base effect associated with the heavy tournament-related spending in 2010. In the years 2011-2012 the annual growth rate of this category might have been 2.35 pp lower than in the scenario without Euro 2012. This effect may also curb the dynamics in 2013, but its negative impact should be much lower. We estimate that for the whole year 2013, due to the base effect, the dynamics of gross capital formation will be about 0.7 pp below the no-Euro 2012 scenario.

 

In Q1 2013 the effect may however be stronger, amounting to approximately -1.7 pp. Finally, the base effect should peter out in 2013, once again supporting higher investment growth rates. All in all, the analysis shows that one should not interpret too much into the current fairly disappointing Polish investment figures without considering the causes and causalities.

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