Shock to the system

Back in February, during a fairly mild winter, the economic data that was released was far from the disaster that some had expected and, together with the hope that inflation would soon be tamed, the Warsaw Stock Exchange surged. Bourses across Europe were even breaking their own historic highs every few days, even though their domestic economies were in worse shape than that of the US. Investors’ moods were undoubtedly buoyed by the good news emanating from the markets for raw materials and energy – and, in particular, natural gas, which drives the largest economy in Europe, Germany. In addition to this, the investor optimism was also being fuelled by the huge profits being made by power generation companies, which have significant listings in Europe. China made its own contribution to this rosy picture by opening up its economy. But by the end of February, the spectre of inflation had materialised once again and was met with strong commitments to fight it. Soon afterwards, the European Central Bank raised interest rates, reminding everyone that inflation within the eurozone had still not been vanquished. However, the critical event that caused the graphs to decidedly plummet in the first half of March was totally unexpected. What happened plunged the market into a panic reminiscent of the one it went through during the financial crisis of 2008. The collapse of Silicon Valley Bank, which financed technology startups, and the travails of Credit Suisse shook markets across the entire world and dragged bank shares down. Are these two events just warming us up for further crises for the financial sector down the line after decades of cheap money? Only time will tell, but for now the concerns of commentators have to be taken seriously.

In Poland, the slowdown was painfully apparent in the Q4 2022 figures. Analysts have stated that the economic activity over these three months was the lowest this century (apart from the pandemic and lockdown afflicted 2020). The fall-off in activity was also the deepest when compared with all other countries in the EU. This was due to the sudden drop in consumer spending in response to soaring inflation and the remote chance of it coming down in the near future. Such figures underpin the forecasts by the EU commission that Poland’s GDP will grow by a mere 0.4 pct in 2023, after having seen growth of almost 5 pct in 2022.

When it comes to Polish construction, although there has been a clear slump in the residential segment, it has been doing surprisingly well in terms of infrastructure projects. In January alone, the land and sea engineering sector grew by 15 pct. The sector was also helped by the warm January, as can be seen in the data for specialised work, which includes pre-construction preparation. According to economists, the final tranche of EU funds for 2014–2020 will continue to support construction throughout 2023, while public investment and infrastructural work is set to offset the shortfall in residential construction.

This might be why the WIG BUD index has been climbing upwards, although this could also partly be due to the excellent performance of the largest construction group, Budimex, which accounts for the lion’s share of the construction sector index. The company is currently sitting pretty, with its ample liquidity (PLN 3.1 bln in cash) and a portfolio worth PLN 13 bln, which will maintain it for the next two years. In 2022 its revenues came to PLN 8.6 bln, while the profits from its ongoing operations rose by 18 pct to almost PLN 550 mln. The group is also well placed to make acquisitions as well as to take on assignments from new sectors, such as the military and renewable energy.

The residential sector at the moment, however, can only dream of an improvement in its situation. Interest rates are still where they were and, with inflation at above 18 pct, there’s no chance of them being relaxed any time soon to free up the mortgage market. The government could ride to its rescue – it has decided to introduce a programme to subsidise mortgages that should begin in the summer, but first the lower house of parliament has to pass the necessary legislation. The availability of homes at affordable prices is sure to be one of the campaign themes of the autumn parliamentary election, since the opposition has also announced its own solution to the problem. Many analysts see the PRS sector as the saviour of the market, but, according to JLL, sales of institutional rental apartments actually fell by 57 pct in 2022, down to PLN 1.3 bln. This is barely 8 pct of all apartment sales, as compared to 13 pct in the previous year. One assumption is that the slump is partially due to Poland being impacted by the fraught geopolitical situation caused by the war in Ukraine, but another is that it has also been a reaction to signals from the Polish government. Its stated intention is to curb the PRS market, which it sees as a threat to home purchases, even though according to estimates it still only makes up 1 pct of the rental market. However, we can expect this market share to continue rising given the more restricted availability of apartments for sale. Interestingly enough, the Polish PRS scene is becoming more international. Along with investors from Germany and Austria, funds from the Near East, Asia and the United States are beginning to join in.

(Mir)