Poles fear recession will hit this time

When Tomasz Nordynski opened his car showroom 21 years ago, Poland was just emerging from the shambles of communism. Since then he has survived numerous economic crises, but the current slowdown has him more worried about his future than ever before.

“The next year will be a lot more difficult than 2009 – at least then the economy sort of held together,” said Mr Nordynski, who owns a Peugeot dealership in the central city of Lodz.

He has seen sales fall by about 15 per cent this year, and expects a similar fall in 2013. He has already laid off workers and more cuts are looming.

“I am not expecting any sort of an economic miracle,” he said glumly. “I think 2013 and 2014 will be very tough. This is the most difficult time for me since opening the business in 1991.”

Mr Nordynski's worries are a microcosm of Poland’s problems as the largest country among the EU’s new members – and the only one of the 27-member bloc not to suffer a recession in 2009 – is battered by the slump in the eurozone and slowing domestic demand. Pride that the country seemed immune from troubles in western Europe is being replaced by fear that the Polish exception – the myth of the “green island” when Poland was the only country growing in a sea of EU red – may be about to be overwhelmed by the general trend.

As growth in consumption, investments and exports declines, and unemployment remains stubbornly high at 12.5 per cent, policy makers are scrambling to react.

The central bank on Wednesday cut its benchmark rate by a quarter point to 4.25 per cent, the second cut in as many months. This marks an enormous change from the optimism that prevailed this spring, when Poland was the only EU country to raise rates.

With the eurozone stagnating, there is little hope of an external stimulus.

The car sector, one of the country’s largest exporters, has seen production fall by a fifth in the first 10 months of this year compared with the same period in 2011, as the European troubles of Fiat and Opel rebound on their Polish factories.

“If our most important trading partner – our western neighbour – finds itself in a long-term stagnation, then of course it will affect our economy,” said Donald Tusk, Poland’s premier.

The government is aiming to reduce the budget deficit to 3 per cent, down from 7.9 per cent in 2010 – one of the most dramatic fiscal squeezes in the EU and one that leaves almost no space for a domestic spending surge.

The government is also constrained by its hard-won reputation on bond markets for fiscal probity; it is having an easier time placing its debt than many peripheral members of the eurozone. Ten-year bonds fell below 4 per cent for the first time ever last week, and the finance ministry has already covered more than 20 per cent of next year’s borrowing needs.

Poland is also feeling the effects of completing a host of expensive road and rail projects ahead of the European football championships in 2012; the pace of new contracts is tailing off. Large new projects are unlikely to materialise until the next seven-year EU budget is agreed – the current 2007-13 budget provided a €68m injection and the next looks set to be slightly larger.

Third-quarter numbers released last week showed the Polish economy expanding at an annual rate of only 1.4 per cent, far below consensus predictions of 1.8 per cent. The finance ministry’s projections of 2.5 per cent growth for this year still look achievable, but next year’s forecast of 2.2 per cent is optimistic – the OECD estimates the economy will grow by only 1.6 per cent in 2013.

With a fiscal loosening unlikely, the Treasury ministry is racing to create an investment vehicle using earnings from the sale of state assets to fund large infrastructure projects in power generation, shale gas exploration and road construction. That, plus continued rate cuts by the central bank, should help Poland avoid a recession.

“We are going to see a lot of sluggishness in the domestic economy, but we have to remember that household balance sheets are still pretty clean and there is some credit growth,” said Peter Attard Montalto, an analyst with Nomura, the investment bank.

“We don’t foresee a recession …There is scope for a moderately fast bounce-back in the second half of 2013.”