Business sentiment improves in January

After a sharp deterioration of economic conditions in the first quarter of 2009, the economic situation in Poland began to gradually stabilise in the months that followed. This was reflected in business confidence data, with companies becoming somewhat less pessimistic about the situation. In the second half of last year the recessionary trends in the world economy began to bottom out, and the Polish economy showed first signs of recovery. However, the steady inflow of improving macroeconomic data was not enough to prevent a seasonal deterioration in business sentiment in the fourth quarter. A modest improvement occurred only in January, although the pessimists continued to outnumber the pessimists.

 

According to research by the Central Statistical Office (GUS), over the past 12 months the biggest improvement in sentiment occurred in manufacturing. In January the general business climate in the sector was neutral, slightly better than in December, and the business indicator was a hefty 13 points higher than a year earlier. However, if we exclude 2009, the index was at its lowest in eight years for the month of January (the manufacturing sector was one of the first to suffer – and suffered more than most − from the crisis).

The result was the consequence of negative evaluations of the current state of order books, despite a certain improvement in relation to December. Both domestic and export orders fell in January, although the latter did so at a slower rate. Because inventories of finished goods remained at an excessive level, the resulting down-scaling of current production was more pronounced than in the preceding month. Although most companies declared that their customers were paying on time, the majority of the surveyed firms continued to report difficulties in paying their bills (the few exceptions were large companies employing 250 or more people and manufacturers of pharmaceutical products, electrical equipment, and paper and paper products).

In the period under analysis, representatives of 12 out of 22 sub-sectors of manufacturing covered by the survey judged the general business climate to be negative. The worst assessments came from small companies (employing between 10 and 49 workers), particularly manufacturers of wearing apparel and leather products. Sentiment was downbeat, too, in sectors such as textiles, basic metals, repair and installation of machinery and equipment, printing and reproduction of recorded media, other non-metallic mineral products, and metal products. In contrast, the most upbeat assessment of their situation was given by representatives of the pharmaceutical sub-sector, one of the industries most resistant to the crisis (pharmaceuticals was the only branch of manufacturing to report an increase in both output and employment in 2009). Sentiment was visibly positive also among manufacturers of paper and paper products, coke and refined petroleum products, chemicals and chemical products, and food, beverages and tobacco products.

 

 

In comparison with the corresponding period of 2009, the biggest improvement in sentiment was observed among large companies, where the business indicator was up by more than 18 points on January 2009 and where the prevailing mood was one of considerable optimism. A marked brightening of moods also occurred among medium-sized companies employing between 50 and 249 people, with the indicator up by 12 points. The increase among small companies was marginal (by less than three points). In terms of sectors, particularly strong improvements occurred among manufacturers of coke and refined petroleum products, motor vehicles, trailers and semi-trailers, basic metals, and electrical equipment. Year-on-year declines in sentiment were noted only in sectors such as printing and reproduction of recorded media, and leather and related products.

 

 

The single most onerous barrier to business at the onset of 2010, according to the surveyed manufacturing firms, was insufficient domestic demand, mentioned by 60% of respondents (the same as a year earlier). Almost one in two companies complained about uncertainty of economic environment (although the perceived importance of this factor declined the most over the past 12 months), while nearly 46% mentioned insufficient foreign demand (down from 48% in Q1 2009). As usual, prominent on the list were high payments to state revenue (41%) as well as unclear legal regulations (31%). More than a year of deteriorating economic conditions pushed the percentage of companies reporting financial problems to 18%. At the same time, with weakening labour demand, shortage of skilled labour was seen as a serious problem only by 10% of the surveyed firms.

 

 

Despite a visible improvement in economic conditions over the past few months, the rate of capacity utilisation in the manufacturing sector remains far from optimal. At the beginning of Q1 it amounted to 72% and was 0.2 p.p. lower than a year earlier (whereas it hovered around 80% throughout 2008). In this connection, it is worthy of note that since Q4 2009 there has been a marked rise in capacity utilisation at large companies. In January it climbed above 76%, compared to 68% at small companies and 70% at medium-sized companies. The highest rate of capacity utilisation was noted among manufacturers of coke and refined petroleum products, paper and paper products, and printing and reproduction of recorded media.

There is a general expectation among manufacturing firms that both orders and output will increase in the months ahead, with particularly upbeat views expressed by large companies (especially manufacturers of coke and refined petroleum products, pharmaceutical products, computer, electronic and optical products, and chemicals and chemical products). By contrast, small companies tend to anticipate declines in orders and output (especially makers of wearing apparel, leather products and furniture). As regards perceived future ability to pay their bills, manufacturers’ assessments remain in negative territory, but are significantly better than in December or in the corresponding period of 2009 (the highest degree of optimism regarding future financial situation was noted among manufacturers of coke and refined petroleum products and of pharmaceutical products, whereas views were most downbeat among makers of wearing apparel and leather products). According to the surveyed companies, we should expect a drop in employment in the manufacturing sector in Q1, but its scale will be less pronounced than predicted in previous months (the only two sectors which expect to add jobs over this period are coke and refined petroleum products and computer, electronic and optical products). Prices of finished goods should rise in most sub-sectors of manufacturing, although price decreases should be expected in wearing apparel, repair and installation of machinery and equipment, computer, electronic and optical products, motor vehicles, trailers and semi-trailers, other non-mineral products, metal products, machinery and equipment, furniture as well as printing and reproduction of recorded media.

 

Despite unfavourable weather conditions, at the onset of 2010 a slight improvement of sentiment was noted in construction (January tends to be the period of weakest activity in the sector). Nevertheless, assessments of the general economic climate remained in negative territory for the fourteenth consecutive month. Although the business indicator rose by about three points compared with January 2009, excluding 2009 its reading was the lowest in six years for this time of the year.

It was the consequence of a fall in current orders and in construction-assembly output that was deeper than in December, although expectations about the coming quarter were less pessimistic (large companies employing more than 250 people expect an increase in orders over this period). Furthermore, construction companies’ assessments of their current and future financial situation also deteriorated substantially in relation to December, and respondents continued to report problems with late payment by customers. According to the surveyed firms, the first quarter should bring a further drop in the prices of construction-assembly works (albeit less pronounced than predicted in December), which is likely to be accompanied by a decline in employment in the sector.

As in the manufacturing sector, large companies gave the best (but still negative) assessments of their current situation, whereas small companies employing between 10 and 49 workers were the most pessimistic (interestingly, microfirms, i.e. those employing less than 10 people, were less downbeat).

In the period under analysis, the most important perceived barrier to business in the construction sector was competition of other firms (mentioned by 55% of respondents). Nearly one in two of the surveyed companies pointed to weather conditions, high cost of employment and insufficient demand. Tellingly, the perceived importance of this last factor increased the most compared with January 2009. On the other hand, the barrier whose perceived significance declined the most over the 12 months to January was shortage of skilled labour, which is now seen as a problem by just 14% of companies, compared to more than half in September 2008. This indicates that the situation in the construction sector is far from what it was at the peak of the previous boom. This conclusion receives further support from data on capacity utilisation in the sector, which fell by as much as 13 p.p. compared with December, to 63%, i.e. the lowest level since March 2005 (but it should be remembered that the sharp drop in construction activity observed in January 2010 was in large part due to a wave of strong freezes).

 

 

Moods in the retail sector were also generally pessimistic in January. Although there was a slight improvement in sentiment compared with the previous month, the business indicator was at its lowest in four years for the month of January (it was 1 p.p. lower even than its reading in January 2009, although it should be remembered that the retail sector in Poland held out longer than most in resisting the effects of the downturn, thanks to resilient domestic consumption).

The drop in current sales was markedly less pronounced than in December, but expectations about the present quarter were very grim. At the same time, problems with paying bills eased somewhat. With the anticipated fall in demand and with continuing excessive level of inventories, companies plan to scale down their orders with suppliers more than they expected in December. The surveyed firms also expect slower price growth and slower decline of employment in the sector.

Assessments of the general business climate in January were strongly associated with company size. Thus, large retail companies (employing over 250 people) viewed their situation very optimistically, whereas medium-sized firms (50-249 workers) showed moderate pessimism, while small companies (less than 50 workers) were very downbeat. In terms of main retail segments, only household appliances & articles retailers expressed optimistic views. Neutral moods prevailed in food products, whereas in motor vehicles and especially in textiles, clothing and footwear companies perceived their situation as very difficult.

 

 

Intense competition remained the main perceived barrier to business in the retail sector, mentioned by 60% of respondents. More than one in two companies pointed to high cost of employment (51%). The barrier which made the biggest surge up the list over the 12 months to January was insufficient demand, which is now perceived as a problem by 47% of respondents, up from 39%. The greatest fall in perceived importance occurred with respect to high payments to state revenue (from 53% to 44%).

 

 

Paweł Sionko

Senior Economist, PMR Publications