How Poland escaped the recession

Feb 05, 2010

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Eastern Europe was the region "most blighted by the financial crisis", says Lex in the FT. But one country managed to escape recession last year. Having grown by 5% in 2008, Poland managed to expand by another 1.7% last year. How?

One reason for its resilience is its comparatively low reliance on exports, which comprise 40% of GDP. A flexible currency also helped temper the down­turn. In addition, Poland "has a huge internal market" of 38 million people, says Monika Kurtek of Bank BPH. Government spending on infrastructure and strong consumption bolstered domestic demand. Retail sales jumped by 7.2% year-on-year in December.

It helped too that the banking system is in "reasonable shape", says Neal Shearing of Capital Economics. Foreign-currency -denominated lending is relatively low, tempering the impact of the falling currency on households and businesses. Banks' funding positions look pretty solid too, given low short-term external debt. Lending to firms may have shrunk, but lending to households has continued to climb.

A less severe credit crunch, a competitive currency and comparatively solid domestic demand all mean Poland is likely to keep outperforming, according to Morgan Stanley. But the bank is not pencilling in a quick rebound to pre-crisis growth rates. Unemployment is still rising, which militates against a big jump in consumption, says Marcin Mrowiec of Bank Pekao. External demand is likely to remain sluggish and the government is planning to cut public spending.

Given all this, the stockmarket, up 33% last year, now seems set to struggle – it still appears to be expecting a sharp earnings rebound. Nor can the market escape the influence of "global investment sentiment", says the Warsaw Business Journal. A renewed bout of risk aversion as the global recovery disappoints is a danger for all emerging markets. There will be better entry points for investors in Poland. Indeed, Shearing thinks the WIG index could fall by up to 10% this year.

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