Economic crisis finally hits Poland

A string of dreary statistics this week shows that the once-booming economy has started to sputter: manufacturing fell significantly at the end of last year, unemployment shot up and officials are finally admitting that Poland is hurting.

Poland "will not be an island resistant to trends outside its borders," Prime Minister Donald acknowledged Tuesday as he announced a plan to seek budget savings this year to cover a likely shortfall in state revenues.

For months, Poland's leaders and economists insisted the country could avoid the global turmoil thanks to its healthy banking sector and low mortgage and consumer debt levels.

Shoppers kept spending at the gleaming new malls that have mushroomed in recent years across Poland — by far the largest of 10 formerly communist countries that have joined the European Union in recent years.
But the days of denial have now passed.

"Everybody is worrying," said Maja Goettig, chief economist for BPH Bank in Warsaw. "The outlook is worsening each month, and the question is how big this slowdown will be. We've just entered it — and nobody knows when it will end."

The economy that grew at a brisk 6.7 percent in 2007 — swelling the ranks of a middle class with money to spend on fine wines, fancy cars and large homes — slowed to a still-healthy 4.8 percent in 2008, according to figures released by the government's Central Statistical Office Thursday.

Data released this week have shown that Poland felt a chill toward the end of the year as the global crisis hit the country's western European neighbors and the United States. Unemployment rose in December for the second straight month, reaching 9.5 percent — due in part to a slowdown in the manufacturing sector as foreign orders fall.

Industrial production in November fell 8.9 percent over the previous year; data released Tuesday showed another 4.4 percent year-on-year fall in December.

The same day, the central bank cut interest rates by a hefty three-quarters of a percentage point for the second consecutive month. It cited a "stronger than previously expected economic slowdown" in cutting its benchmark rate to 4.25 percent
As worries deepen, Poland's zloty has depreciated significantly in recent months against major currencies like the euro and the U.S. dollar.

The question now is how bad things will get. Many experts still believe Poland can weather the storm better than other European countries and manage modest growth in 2009, although it exports heavily to countries already in recession.

Goettig says her bank predicts 2 percent growth for now, but expects to revise that downward to zero growth. Tusk, the prime minister, said the government's "pessimistic" scenario is for 1.7 percent growth.

Another source of instability comes from the fact that many of the Poles who bought homes in recent years took out mortgages in Swiss francs. Now that the zloty has declined, some are finding it harder to repay their loans.

Despite the souring mood, there are some reasons for optimism.

Polish banks are tightly regulated and were never burdened by the toxic assets that have brought down financial institutions elsewhere. Economy Minister Waldemar Pawlak says Polish banks, mostly owned by large Western European banks, are often in a much better situation than their parent companies.

And bucking the larger trend, retail sales in December grew 6.6 percent over the same month in 2007, better than experts expected.

However, the state statistics office said this week that consumer confidence is now falling.

Agata Lagan, who runs a string of high-end clothing shops throughout Poland, attests to that. She said December sales fell by 30 percent in her Lilla Moda shops in Warsaw year on year.

Another factor weighing on profits is that the battered zloty has made it more expensive to import the goods.

"Usually when we have a new collection, the shops are full of customers ready to shop on the first and second days," she said. But when a new collection arrived two weeks ago, the crowd was less than half the usual size.

"Everyone is waiting for discounts," she said.

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