The crunch with perfect timing

Radosław Górecki, Eurobuild CEE': The Bank Zachodni WBK report on the prospects for 2013 is entitled ?On the Edge'. Looking at the various market analyses, you could conclude that we have been on the edge for more or less two years. And here the question arises whether we are doomed to finally fall into the precipice or perhaps manage to pull back from the brink by some miracle?
Maciej Reluga, chief economist at Bank Zachodni WBK: I disagree with the statement that we have been on the edge for two years. You need to remember that in 2011 and throughout a large part of 2012 the Polish economy was developing at a decent rate. Now we are coming to a point where we could actually find ourselves on the edge of a recession. We can look at 2013 in two ways: if someone wants to be a pessimist, they could of course say that the risk of recession is quite high. They could assume that the whole year will be worse than the last one. In 2012 economic growth probably reached a level of around 2 pct, in 2013 it is likely to be around 1 pct.

This is the pessimistic version. What about a more optimistic scenario?
It seems to me that each quarter of 2013 is going to be better than the previous one. I mean, after hitting the bottom in the first quarter we will start bouncing back. But this bounce will not be quick. It will be rather slow and long term. We will not be back on the path of economic growth at levels of 3 or 4 pct. However, there is a good chance that growth will amount to app. 2 pct at the very end of 2013.

Investors on the property market do seem to be optimistic. They claim that Poland is quite an attractive economy in comparison to other countries in the region. They don't seem to be wary of any lurking dangers. Is their optimism well-grounded?
I think that they have the right to be optimistic. After all, when making investments, they are looking at the next 5 or 7 years, as opposed to the next few weeks or months. It is worth remembering that the Polish economy has been quite successful over the last few years. The reasons for this, the increase in productivity and greater competitiveness, have not disappeared. They will continue to play an important role in the years to come. So despite the fact that 2013 will bring an economic slowdown, we will eventually start coming out of this bad patch. I think that 2014 might still be difficult, but starting from 2015 we will see a faster pace of growth. But we should not compare this to the situation before the crisis. There will be no growth at levels of 5-6 pct per year. From the point of view of foreign investors, the Polish economy provides better prospects than other markets. Developed markets such as Germany will not be growing at a rate of 3 pct. It would be great if their growth exceeds even 1 pct. Against this background Poland will be...

...the proverbial "green island"?
Compared to other countries the Polish economy is doing quite well. After all, in the years 2008-2011- we do not have comprehensive data for 2012, but I think they will be quite good) - the Polish economy increased by a total of nearly 16 pct. We were followed by Slovakia with growth of half our rate. Even if we don't make any positive headway in 2013, there is still no basis for thinking that this will continue in the longer run.

And where is this revival going to come from?
I do not believe that domestic factors will have a bearing on this. It is not the same story as in 2009, when exports collapsed but public investment, infrastructure and consumption combined to absorb the crisis. At the same time interest rates were lowered very quickly and the złoty lost a lot of its value, which resulted in the higher competitiveness of our exports, and this is how we came out of the crisis unscathed.

And what is the situation today?
These absorbing factors are no longer there. Fortunately, the external shock, which is passing, is relatively small compared to the one in 2009. Polish exports are coping despite the recession in the eurozone. And here the question arises: why is this the case? And will we be able to cope in 2013? My assumption is that the trigger for the revival will be exports. This might be followed by another factor, which could transpire in the second half of the year - domestic demand in the form of consumption. It is quite possible that there will be an improvement in Europe, particularly in Germany. Some data points to this. Germany is a global exporter, so provided that the global economy is developing at a rate of more than 3 pct, Germany will benefit from this. Because Poland is in a way connected to these exports, we will also benefit. Moreover, when large economies struggle, countries such as Italy or France tend to go for cheaper substitutes. Polish products are excellent at supplying this need. We are also seeing a growth in exports to Russia, Ukraine and the Czech Republic, as well as Great Britain. Exporters are looking for new sales markets. And, importantly, they are finding them. This is what will help us in 2013.

The property market is usually seen as a safe haven regardless, in theory, of the economic climate. Has that changed?
I think so. After all, the crisis being experienced in a lot of countries has been caused by what happened on the property market. It was the case that assets in the form of real estate contributed to the global crisis. So this market cannot be treated as safe. Speculative bubbles plunged not only the USA but also Ireland and Spain into recession. Of course, now we are aware of the fiscal problems over there, but these have been caused by excessive debt in the private sector, and consequently, a bubble on the property market. Poland looks relatively good against this background, as our debt is very small, in terms of mortgages and company debt. Firms can continue financing themselves from their own funds rather than loans. This non-committal approach and the fact that we have had no time to run up significant debt means that we are now in a secure position.

So we were saved by a certain backwardness in the banking sector in a way?
Yes, we were. That is why I believe that the crisis occurred at a good time for us, especially when it comes to the residential market. What was happening with mortgages in foreign currencies - when they were offered 40-year terms in amounts above the property's value - was an alarm call. The loans were growing at a speed of several dozen per cent per year. If it had not been for the crisis, they would have continued growing and quite a sizeable bubble would have developed. Fortunately, this has now ended. Apartment prices started decreasing, but they did not collapse suddenly. Today we are looking for a new balance. People are afraid of losing their jobs because the situation on the job market is uncertain and it is difficult to make decisions on long-term commitments at such times. So here we have a certain psychological effect. At the same time interest rates are not decreasing so fast.

They are being cut very cautiously...
Yes, they are, but we have more cuts ahead of us, which will lower the cost of loans. The Financial Supervision Authority wants to introduce a recommendation that will make access to loans easier. But this will take some time to implement. However, it seems likely that at the end of 2013 there will be a revival in new loans. Still, the growth in loans should not exceed 20 pct. If this is the case, I think we should start worrying. We should rather expect growth of a few per cent.

The situation on the commercial market also looks interesting. If we take look at Warsaw alone and the projects that have been announced, it might seem that we are at the peak of prosperity rather than in crisis. A few skyscraper projects have been announced and a number of huge shopping centres. Are investors...
They know what they are doing...

Really? After all, the next few years don't look so rosy.
But if we take into account the economic fundamentals, the risk of investing in Warsaw is relatively low. Besides, the commercial property market is sufficiently transparent and now functions on the same principles as mature markets, while at the same time providing better opportunities. Even if we had a recession in the first half of 2013, it would not last for the next six quarters. We will bottom out, but we know why as we are aware that there are fewer public projects... However, this does not mean that the situation will stay like this for the next few years. Some time will pass before the buildings are finished. However, the situation is worse when it comes to retail. Here we are experiencing a clear collapse in consumption. The figures for the last quarter were the worst in recorded history. There are a few reasons for this - the growth in salaries has stalled and inflation has eaten a lot of the growth away. We need to consider whether the current crisis has not been partly caused by the phenomenon of excessive consumption. Perhaps we need to come to terms with the idea that 2 pct growth in consumption would be quite good.

Could this mean that investors and banks will turn their backs on shopping centre projects?
I do not know that. I can only say that in the next few quarters consumption certainly won't be the main driver of growth. If it is, it will be a delayed effect, behind the impact of exports. Still, the revival in consumption will be meagre. And this is the prospect for 2013 and 2014.

This is not good news for retail chains, particularly those that have built their market positions on operating from shopping centres. There is also an additional factor here - the weak złoty. A significant volume of retail rents are paid in euros.
Here we touch on different points of view. Of course the weak złoty is bad news for retail chains, but from the point of view of the economy, it is just the opposite. In my opinion, the złoty should be even weaker in order to improve our competitiveness. This would make the lives of the companies in question more complicated. For them it would mean paying higher rents and the goods they import would be more expensive. And since people have less money they are spnding less, and business will be even more difficult. So I would reiterate from the point of view of the whole economy that a weaker złoty would help us - in spite of the fact that individual sectors might suffer.

So this is where the points of view of macroeconomists and businessmen part?
It depends which businessmen, but certainly not exporters. People who have their mortgages or loans denominated in Swiss francs would like the złoty to strengthen. However, this would not be good for the whole economy either. We need to remember that after some time we will see the benefits of the weak złoty. If the revival is to happen thanks to exports, exporters will employ more people, and the people employed will make more money and spend more as a result. And this will have a feedback effect. But I am not talking about the next few quarters, but the next few years.

Are you an optimist, a pessimist or rather a realist?
The best answer is: a realist. But I am an optimist by nature.

An optimistic-by-nature realist
Maciej Reluga is a graduate of quantitative methods in economics of the University of Warsaw's faculty of economics. He also completed a programme in financial management at the University of Namur in Belgium. He has been involved in analysing and forecasting economic indicators for several years. Since mid-2002 he has been the chief economist at Bank Zachodni WBK and has previously worked for the Polish National Bank and ING. He has completed many courses and training sessions in financial instruments, forecasting and management methods. In 2010 he completed the senior management programme in banking at the Swiss Finance Institute. As he himself says, he is an optimist by nature. In September 2012, Maciej came first in a ranking of macroeconomic forecasters drawn up by 'Puls Biznesu'. His semi-annual forecast was exceptionally pessimistic at the time