Clear signs of recovery

 

 

At the beginning of the first quarter of 2010 the value of the IRG SGH barometer amounted to -16.1 points and was 0.4 p.p. lower than at the onset of Q4 2009. Although the barometer typically tends to fall in the first quarter (due to seasonal factors), the observed drop was much smaller than in previous years. This was partly owing to base effects, as business sentiment at the turn of 2008/2009 was particularly gloomy (at the beginning of Q1 2009 the barometer tumbled by more than 17 points compared with Q4 2008 and hit an all-time low), and remained weak throughout 2009 despite improving in the second half of last year. Yet the decline was also significantly smaller than the long-term average, which is seven points. In this light, the latest reading of the IRG SGH barometer clearly points to a revival of economic activity. Its signs are evident in all the sectors covered by the research, albeit with varying degrees of intensity.

 

 

The quarterly fall of the barometer was due to a seasonal deterioration in manufacturing, transport and agriculture. The main drag on the barometer’s value was the manufacturing sector, where the business indicator plunged by 9.7 points over the quarter. However, it is important to note that from November onwards the rate of decline of the indicator slowed consistently. Companies from the manufacturing sector are optimistic about the near future and expect an improvement in the domestic economic situation (their optimism is based on observed growth in new orders). Meanwhile, the business indicator in the transport sector fell by 7 points in Q1 and in agriculture it declined by 5 points. These changes are also in line with well-established seasonal patterns. In the months ahead the impact of seasonal factors will be positive. As a result, expectations about economic conditions in these sectors are moderately optimistic.

The factors that made a positive contribution to the value of the IRG SGH barometer at the onset of Q1 were improving conditions in the construction, trade and banking sectors as well as an improvement in the financial situation of households. Of these, only the rise in conditions in the trade sector is a typical occurrence at this time of the year. But for the trade sector, the period of positive seasonal effects is largely over. In the course of the last quarter its business indicator gained 8 points and approached its long-term average. We should therefore expect a stabilisation of conditions in this industry in the near future.

In the three remaining areas, i.e. construction, banking and households, the observed changes in indicator values are untypical of this time of the year. They should be read as signs of reviving economic activity emerging earlier than anticipated. In construction the business indicator rose by 4.5 points over the quarter. The expectations of construction firms about the near future are optimistic as well. However, the unusually harsh winter could exert a negative impact on their situation. As always, the biggest upswing in activity should be expected in the spring. In the banking sector the business indicator posted its third consecutive quarterly gain, this time by 4 points. Even so, its value remained well below its long-term average, but further improvement of conditions in this sector should be expected in the months ahead. Crucial for the predicted rise in the value of the IRG SGH barometer in the next quarter is the improvement in household sentiment. The household indicator rose by 5.4 points compared with the onset of Q4. As in the banking sector, this represented its third quarterly improvement in a row, this time driven mainly by more upbeat expectations about future domestic economic situation and an easing of worries about job loss. With the unemployment rate remaining at a high level, these views should be interpreted as a sign of growing household optimism, which should stimulate economic activity. However, it should be noted that companies are significantly more pessimistic about the outlook for jobs. In the first quarter they reported a slight drop in employment and expected no changes in the months ahead.

 

 

The strongest signs that economic conditions are improving are provided by the annual changes of both the IRG SGH barometer and the sectoral business indicators in Q1 2010. The barometer’s reading for the beginning of the first quarter of this year was 14 points higher than a year ago, a bigger increase than in previous years, although a low reference base played its part. By way of comparison, to date the steepest increase for this time of the year was 9 points (in 2007).

Business indicators were up in annual terms in all the surveyed sectors. The highest increases occurred in transport, manufacturing and banking; somewhat lesser gains were noted in trade, agriculture, construction and households. The annual increases provide clear evidence that the negative impact of cyclical factors has all but disappeared and that sentiment is brightening, leading to higher activity among both companies and households.

Based on the observed changes in current assessments and expectations of companies and households, we should expect further improvements in economic conditions in the months ahead, helped by both seasonal and cyclical factors. One source of risk for this positive scenario is a possible deterioration in the external economic environment, particularly in the EU. The labour market is likely to be the last to experience symptoms of recovery.

 

 

Prof. Elzbieta Adamowicz

IRG SGH

 

Joanna Klimkowska, Ph.D.

IRG SGH