Poland/
Poland is the largest of 10 ex-communist countries in eastern Europe that joined the European Union in recent years and enjoyed high growth since joining in 2004. Government efforts are on to ensure Poland’s budget deficit remains at 2.5 per cent of gross domestic product this year as planned. The officials believe that there would be no need to amend the budget even if the country’s economic growth fell to 2.0 per cent as forecast by the European Commission. Poland’s 2009 budget assumes growth of 3.7 per cent. However, Polish central bank policy makers offered differing views on the scale of the economic slowdown in 2009, underscoring uncertainty about the impact of the global financial crisis on the EU’s largest eastern member.
According to a latest economic update of the central bank, a growth of around two per cent is expected this year. The figure marks a significant slowdown from a predicted growth rate for 2008 of under five per cent, with markets expecting the central bank to respond by cutting interest rates by a total of one percentage point during 2009. Analysts have in recent months slashed forecasts for the local economy as worries mount that recession in the euro zone, Poland’s main trade partner, will derail years of strong growth.
The deteriorating outlook for the economy also prompted the central bank to slash borrowing costs by a total of one percentage point late last year, including a 75 basis point cut in December, its biggest easing in six years. The main interest rate in Poland now stands at five per cent. The Polish government expects the economy to expand at 3.7 per cent in 2009, but analysts are less optimistic and predict growth to slow to 2.8 from five per cent expected in 2008. The recession in the European Union will likely be protracted but shallow and that the easing cycle the Polish central bank launched in November was aimed at bringing growth back to its potential.
Poland’s industrial production dropped 4.4 per cent in December over the same month last year. The figures mark the second consecutive month industrial output has fallen in Poland, the largest of the new European Union members. In November, output was down 8.9 per cent over November 2007. Industrial output may decrease by 2.9 y-o-y and rebound by 3.5 per cent in 2010 after growing by 5.6% in 2008. Lower industrial output has put pressure on the currency, the zloty, which has weakened considerably in past months against the euro and dollar.
Meanwhile, inflation may fall relatively below the upper level of the bank’s target range, meaning below 3.5 per cent, but then inflation may rise. Analysts expect that the country will not reach the target of 2.5 percent this year. Annual consumer price growth is estimated to have slowed to 3.4 per cent in 2008, falling to within the central bank’s target range for the first time since October 2007. Mid-year inflation is anticipated to reach 2.9 in 2009 against 4.3 per cent in 2008. It will be around 3% in 2010.
Poland is the most stable economy in the CEE region and is expected to suffer from the economic slow down to a less extend than other countries of the region. It may still count on a three per cent economic growth in 2009 which is mainly feasible thanks to low tax rates, strong internal demand and UE funds inflow. The predicted unemployment rate at end 2009 is to reach 10.6 against 9.3 per cent at end 2008. The budget deficit in 2009 is expected to come in at 2.6 of the GDP against 2.2 per cent of GDP in 2008 and expected around 2.5 per cent GDP in 2010).
The economy ministry said that foreign direct investment in Poland was down by 27.5 per cent — at euro11.5 million ($15.2 million) — between January and November of 2008 compared with the same period a year earlier. Amid the global crisis, many investors have pulled money from emerging markets to put them in countries considered safer havens. The economy will face a number of tough challenges heading into 2009 as the eurozone embarks on its economic downtrend, risk aversion towards domestic financial assets remains elevated and external credit lines diminish.
Turkey
Turkey’s once fast-growing economy could contract in 2009, according to a World Bank forecast. Fresh developments next year in the Turkish economy could range from a slight contraction to economic growth of two percent as the global financial crisis takes it toll. The government has an official growth forecast of four percent for 2009, but economists say this is impossible to achieve as the country’s exports and industrial output drop sharply. The Turkish economy grew just 0.5 per cent in the third quarter, its lowest rate in six years. Latest data showed consumer confidence slumping to a record low. Turkey’s economy has expanded nearly seven percent in the last six years, making it one of most-closely watched emerging market economies.
Very low growth rates for two successive years will mean very serious loss of jobs for Turkey. Measures to stimulate domestic demand are needed urgently. It is possible that the rate will be lower or higher than this, but most probably there will be positive growth at a low rate. Unemployment would rise. It jumped to 10.3 per cent in the August to October period from 9.3 per cent a year earlier. Consumer confidence index in Turkey has fallen to new lows in recent months as the global economic crisis intensifies. Business leaders and economists have warned that Turkey could slip into recession without an IMF deal to support investment and capital inflows into the country.
Analysts estimated that economic growth could plunge to zero in Turkey due to a global financial malady in 2009 however the country’s economy was more resilient to such a crisis than it used to be in the past. 2009 will be tough year for Turkey as it will be for many countries and the country’s economy might stop growing. But Turkey is in a much better position now to tackle such a crisis. The banking system is strong and the government attached importance to structural reforms which have proved to efficient in reducing inflation and public debts, and boosting foreign investments.
Following the economic downturn GDP growth will drop from 4.6% in 2007 and 3.3 in 2008 to an estimated 1.6 per cent for 2009 Thanks to softening commodity prices and weakening domestic demand, inflation is likely to fall from 10.3 to 8.3 per cent but it seems that unemployment will rise at one percentage point in 2009 reaching 10.5 per cent. Turkey’s current account deficit, which have reached 6.7 per cent of GDP in 2008, is probably going to be restrained in 2009 due to FDI inflows. In addition, central bank could support Current account deficit with its $80 billion reserves. Turkey’s macroeconomic fundamentals seem resilient as long as social unrest due to unemployment and low wages is not expressed so far in a pressing manner.
Turkey is expected to sign a regular stand-by agreement carrying stringent conditions and giving Ankara automatic access to IMF funds, or a more flexible precautionary deal, which would grant funds only if needed. The economy minister expects that structural adjustment steps and technical studies required for a new IMF deal would be completed soon. A new loan accord with the International Monetary Fund, which Ankara has been negotiating with the IMF, could pave the way for lower interest rates. However, Turkish and IMF officials temporarily suspended talks on a new accord that could be worth as much as $25 billion because of a lack of agreement on reforms that Turkey must undertake.
Money that will come from the IMF may soften tightening credit conditions and bring further interest-rate cuts. Turkish business leaders and investors urgently want a stand-by agreement to stabilise the $700 billion economy after a previous $10 billion IMF loan deal expired in May. Turkey is certainly in a much better position today to weather the crisis than it was seven years ago, when the exchange rate system collapsed while banks and financial institutions went bankrupt. Since 2001 the government has successfully implemented structural reforms to the financial system. However, Turkey has not fully felt the impact of the financial crisis in the US and other major world finance centers because of a “time lag” factor.
Turkey’s economy began slowing sharply in the second half of last year in response to the global economic crisis, having grown around seven per cent annually since a 2001 domestic financial crisis. In the third quarter, growth stood at 0.5 per cent year-on-year, a six-year low. According to figures, the downturn in the global economy started to bite harder into the Turkish economy in the last months of 2008.The economy saw its slowest pace of growth in six years at 0.5 per cent in the third quarter, after recording 2.3 per cent growth in the second quarter. Certainly almost major economic indicators show that the economy has been slowing down.
The banking system seems to be in a strong position despite the global economic downturn triggered by the credit crunch. Bank balance sheets look promising as their lending policies are closely monitored by state agencies. Turkish banks have limited foreign exposure, unlike the banks of Europe. While many global banks have lost billions in write-offs, Turkish banks have increased their profits. Even foreign banks operating in Turkey posted record profits while their parent companies were busy with write-offs on unpaid loans and credit. Fortis Bank and Dexia, two European banks with operations in Turkey that suffered losses outside Turkey and were bailed out by European governments, are strong in Turkey.
Turkish exports will certainly be impacted by a drop in demand from countries experiencing recession, especially the US and those in the EU. The good news for Turkey is that the declining export figures in the West can be cushioned by increasing exports to the Middle East and Gulf countries. Most worrisome to economists is the status of current account deficit in Turkey. The current account deficit reached the $47.1 billion level in the 12 months ending in July 2008. By the end of the year, the current account deficit is estimated to have exceeded $50 billion. Funding the deficit will be a major challenge for the Treasury as investors will hold onto their cash reserves until the market clears.
New Zealand
New Zealand’s economy will stay in recession at least until the end of March this year and a worsening global outlook is adding to the risk of a steeper slowdown. The Treasury said the economy appeared to be developing in line with its worst case scenario put forward in its December economic and fiscal update. The economy is expected to continue weakening in 2009 with a further fall in real GDP predicted for the March quarter. The New Zealand economy contracted in the first three quarters of 2008, entering its first recession in a decade. The worsening global economy would further hurt and delay recovery.
The Treasury said tax cuts, which came into effect last October, and cheaper fuel would help to shore up consumer demand, but investment and export volumes were likely to have fallen further in the fourth quarter. The department’s ‘downside’ scenario given in December forecast the economy contracting through 2009 before mild growth from mid-2010, along with a rising current account deficit and higher unemployment. Meanwhile, ratings agency Standard and Poor’s warned the country’s foreign currency debt rating was at risk of being downgraded, saying a credible fiscal plan was needed to revive the economy.
The economic outlook had deteriorated since the Treasury gave its latest set of forecasts on December 18. The New Zealand economy may not register growth in 2009, while unemployment is likely to rise sharply over the next few years. New Zealand, which entered a recession in the first half of 2008, would continue to struggle as the international economic outlook worsened. As a result, unemployment may climb as high as 7.5 per cent by 2011. The Treasury said the economy would grow by 0.3 per cent in the year to March 2009, and 0.8 per cent in the year to March 2010. The unemployment rate in the September quarter was 4.2 percent.
The sharp downturn in the economy should help inflation return to target in 2009. Indeed, pipeline pressures and inflation expectations have started to ease and, in our forecasts, annual inflation will fall below the RBNZ’s target range of 1-3 per cent by 4Q09. The problematic global economic and financial market outlook, sagging domestic house prices, the falling terms of trade, and the improving prospect that inflation will return to target range in the near term provides ample scope for the RBNZ to ease policy assertively.
The current account deficit also grew, highlighting the country’s vulnerability to the global credit crisis. The $NZ6 billion deficit for the quarter pushed the annual deficit to $15.5 billion, a rise from 3.1 percent of GDP at the beginning of 2002 to 8.6 per cent for the year ended September 2008. The country has become a “huge debtor nation,” with international liabilities of $297.1 billion and assets of only $131.2 billion. The $165.9 billion difference between assets and liabilities compares with a $97 billion gap at the beginning of 2002.
The outlook in New Zealand was “pessimistic” because consumers have high debt levels, house prices were falling and the export and tourism sectors faced negative conditions in the months ahead. Demand from Asia is critical to New Zealand’s economic prosperity. However, with this demand expected to decrease markedly and default risks likely to rise, New Zealand’s exporters will be hard hit in 2009. Regardless of fiscal and monetary policy changes there was a tough year ahead for local businesses.
There would be a need for “structural adjustment” in countries such as New Zealand, Australia, the United States and the United Kingdom where growth was underpinned by increased housing wealth and credit financed consumer spending. Those countries that need to wean themselves from easy credit and from the dominance of the financial sector for growth, jobs and tax revenue will face the most significant challenges in 2009.
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