WORLD ECONOMY Archives

24/06/2016by EOS Intelligence EOS Intelligence No Comments

BREXIT: First Thoughts

In a landmark decision, UK’s citizen expressed their preference to leave the European Union. While the process is not straight forward, and will take at least two years to complete, Britain could struggle to lift the markets sentiment in a short to medium term.

Sterling Pound, probably one of the strongest currencies in the world, immediately suffered the largest drop in the past 30 years. Stock markets across the world have also responded to the news, with most stock exchanges witnessing a significant drop in share prices. This only reciprocates the negative market sentiment currently dominating the market. Some even feel that announcement of BREXIT could be a dawn a new recession period, similar to the 2008 crisis.

Britain will have to undergo massive negotiations over the next two years – not only in terms of their relations with other EU member countries, but also at a more granular level. Most companies will have to renegotiate their EU-wide contracts, to enable provisions for a separate/independent Britain. A major challenge will be addressing trade with EU member states, as well as countries with which EU has signed free trade agreements, which according to estimates puts about £250 billion worth of trade at risk.

Several companies, especially the ones which use Britain as the base to serve other EU markets, have been left in the midst of turbulent waters, unsure of what pans for them in the future. All will again depend on how negotiations go among the 27 EU member states during a long drawn process, after Britain enforces the Article 50 of the Treaty on European Union, for officially exiting the EU.

China, already suffering from the stock market and debt crisis in early 2016 following a crash in crude oil prices, could see its trade with European countries taking a hit. UK is the second largest customer for China in Europe. Weakening of the Sterling Pound and Euro is expected to erode the competitive advantage that China sought by devaluing its currency several times since August 2015. Moreover, the negative market sentiment is also likely to drive the crude oil prices further downwards, which could add the pressure on the debt-ridden country.

The knock-on effect will also be felt in other emerging markets in Asia. Nomura’s analysts predict growth rates in other Asian emerging markets to drop by up to 1.0 percentage point.

EOS Perspective

While many expect the impact of BREXIT to be felt gradually, the short terms scenario certainly seems to point otherwise. All will depend on how the exit process progresses, along with the negotiations, which might leave Britain in a slightly less advantageous position. Even if all goes well, it will take several years to attain normalcy.

08/06/2016by EOS Intelligence EOS Intelligence No Comments

Zika Virus Headed To Europe: WHO Alerts Several European Countries

Zika virus is likely to spread across the European countries after being predominately contained in Caribbean islands and Latin America (we wrote about it in our “Zika Virus Outbreak: How Is It Dampening the LATAM and Caribbean Economies?” article in May 2016 issue). While Zika is expected to arrive to Europe this summer, World Health Organization (WHO) declared that the risk of virus transmission across European countries is low to moderate.

Europe should brace itself as Aedes aegypti mosquitos (Zika virus transmitters) are likely to flock the continent in summer months, which provide an ideal thriving temperature for the mosquitos. The risk of transmission is expected to vary across countries. Madeira Island and the north-eastern Black Sea coast are highly susceptible to the virus if appropriate measures are not taken to alleviate the threat. In countries such as France, Italy, Malta, Croatia, Israel, Spain, Monaco, San Marino, Turkey, Greece, Switzerland, Bulgaria and Romania, among others, the likelihood of Zika transmission is expected to be moderate. Northern countries, including Belarus, Latvia, Iceland, Estonia, and Finland are not likely to be impacted by the virus. As of April 2016, The European Center for Disease Prevention and Control registered 452 Zika cases across Europe imported by travelers, however, no local infection has been detected yet.

For the regions with moderate to high probability of Zika breakout, WHO has urged to bolster vector-controlled measures to reduce mosquito breeding sites. Also, the countries are required to increase preparedness by training health experts, so that they can impart care to people affected with Zika, particularly women.

Zika’s impact on tourism or economies of European nations still remains unclear, as the virus outbreak alert has just been issued. However, there is a probability that tourism might be impacted, as pregnant women have already been alerted to postpone travel to areas with likelihood of virus transmission. Several travel companies have declared that they will be as flexible as possible with pregnant customers. Further, with regards to EURO UEFA Championship 2016 scheduled in France (moderately susceptible to Zika), WHO has assured that it has the capacity to detect and curb local Zika virus transmission, if it occurs.

European countries have already started taking precautionary measures to mitigate risk of Zika transmission, hence, the intensity of impact on tourism or economy is likely to be lower as compared with LATAM and Caribbean regions.

15/03/2016by EOS Intelligence EOS Intelligence No Comments

Anatomy of a Bubble – Case Study: China

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For years, China has been seen as a shining beacon amidst the global crisis, growing at a stunning pace while other countries reeled under the pressure of the global economic downturn of 2008-2009. However, Chinese stock market crashes, first in August 2015, and now at the start of 2016 have let people to question whether China is as immune to crisis as initially thought.

As per estimates by the Economist, Chinese equity market only impacts 15% of households. Therefore, the possibility of a widespread depression was quickly ruled out. However, there are other forces which are likely to be a greater cause of concern for the Chinese government, and possibly everyone around – the most prominent of them being the huge government and corporate debt bubble.

Looking at recent developments, there seems to be a striking resemblance between the increasingly swollen and inflated Chinese debt bubble and a simple spherical bubble, one that is impacted, shaped, and molded by a range of forces, as studied in school science books.

EOS Perspective

China is under pressure in the face of rising labor costs, industrial overcapacity, falling prices, and weak global demand. Combination of economic slowdown, excess production in manufacturing, and rising debts at the macroeconomic level may cause a massive wave of firm closures and bad loans.

While China has expressed its intentions to reform its debt situation, internal and external market factors have forced the government to plunge more money into the market to finance economic growth and sustain the entire economy. These initiatives may diffuse the situation getting out of hand on a short-term basis. But the repercussion of a future debt crisis could be more severe. The scenario would not only be severe for China, but several other economies in the region, which are key sources of raw materials to China.

From a procurement point of view, while increasing price competition could make China still feature as an attractive proposition, buyers must consider the suppliers’ debt situation before making any decision. No one knows when, or if, the Chinese debt bubble will burst. With the situation still unclear, short-term contracts could be the way forward.

26/11/2015by EOS Intelligence EOS Intelligence No Comments

The West vs. Russia: Will Russia Really Survive The Impact Of Sanctions?

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Russia trampled international laws with annexation of Crimea (previously part of Ukraine) to its territory and is reeling under wrath of sanctions imposed by the EU, the USA, Australia, Canada, Norway, and Switzerland, among others. Over a period of time, the sanctions have expanded to inflict economic damage to Russia by targeting its financial, energy, and military sectors. Even though the ball has always been in Russia’s court, the country has only deepened the damage by retaliating with food embargos and standing adamant on its decision to hold on to Crimea against Ukraine’s sovereignty.

The sanctions are intended to limit trading relationships with Russia, which in turn have adversely affected both the EU and the USA. The economic impact is more intensive on the EU member countries and Russia, as they were engaged in high volume and value trading relationship.

Russia’s economy is suffering under the contracting GDP, growing inflation, capital flight, as well as Ruble depreciation. Economic turbulence has been further intensified with plunge in global oil prices — as Russia’s is one of the world’s largest oil producers, with oil and gas exports accounting for 70% of its export income.

The sanctions also had a crumbling effect on the Western companies operating in Russia. Several luxury and consumer goods companies had previously flocked into Moscow to capture the growing middle class market, however, Russia lost its attractiveness and image to being a ‘malignant country’ post Crimea annexation. After the sanctions were imposed, several consumer goods companies shut down their operations — Zara, a Spanish fashion brand, closed flagship store in Moscow in 2014. Wendy’s (an American international fast food restaurant chain), Esprit (China-based clothing brand), and River Island (British fashion shop) are also planning to end their operations in Russia. Consumer spending and retail sales reflect the economic sanctions with retail sales falling 7.7% y-o-y in February 2015.

In August 2014, Russia devised a strategy to retaliate against Western countries by banning agricultural import of certain products from the USA, the EU, Canada, Australia, and Norway. Presently, the Russian government is encouraging domestic production to reduce reliance on imports. However, it will take at least five years, if not more, before import substitution starts yielding real impact on domestic food availability and the Russian economy.

EOS Perspective

There is no doubt that sanctions along with falling oil prices have damaged Russian economy. Decline in oil prices strained the availability of domestic liquidity, which could normally be compensated with foreign debt market borrowings. However, borrowing has been prohibited by the ban on Western debt and credit, which intensified the situation and put crushing pressure on the Russian economy.

It is expected that the sanctions are not going to be lifted any time soon, which is projected to bring absence of foreign loans, which in turn is likely to be paired by significantly reduced of foreign investment. This could be a major challenge for Russia, as the FDI tends to be one of the key sources of capital and technologies in emerging nations. With this isolation, Russia might not be able to keep the necessary pace of growth due to lack of capital and limited trading relationships.

Under the pressure of sanctions, Russia can be expected to undergo a transformation to rebalance its economy — with Western companies exiting Russia, their place could be taken by Asian counterparts or domestic companies. For instance, in October 2014, Russia signed 40 agreements with China spanning energy, financial, and technology sectors. Further, Chinese banks agreed to offer credit lines valued at US$ 4.5 billion to Russian banks and companies. These recent agreements clearly show that Russia has been seeking to deepen its strategic ties with Middle Kingdom, intending to improve trade between the two countries to double it to US$ 200 billion by 2016 end.

Sanctions are likely to continue to deeply impact Russia’s key choices in its internal policies as well as the international arena, with expected focus to increase domestic production and choosing Asian allies over Western partners to establish trading relationships.

17/06/2014by EOS Intelligence EOS Intelligence No Comments

A Dragon Unfurls its Wings – How China’s Economic Slowdown Is Rippling Through Emerging Markets

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Almost 10 years ago, Goldman Sachs published a report, in which it predicted Chinese GDP to overtake the USA’s GDP by 2020. Today, this prognosis looks like a far-fetched dream as China has recently been riding a wild economic horse. When Chinese economy was growing, its demand for various products and services contributed to the economic growth of emerging markets across the world. The deteriorating performance of Chinese economy over the past few years appears to have started adversely affecting these markets. Will the emerging markets be able to successfully sustain in future?

China witnessed a spectacular and continued rise of its GDP during major part of last three decades. However, end of 2007 saw a turning point, and the country’s economic growth rate cooled off from 14.2% still in 2007 down to 9.6% in 2008, reaching mere 7.4% in the first quarter of 2014. This single digit growth would be more than satisfactory for a lot of economies. However, for China, which regularly recorded double digit rates, this extended period of slower growth is disappointing, with some calling it as ‘an end of an era’.

For years, China was enjoying relentless economic growth through massive investments, exemplary rise in exports, as well as abundance of labor force which was available at low wages. Due to these factors, economists started referring to China’s economic growth model as an investment-and-export driven model. This model has played a key role in driving exports also from emerging markets such as Latin America, Asia, and Middle East, as there was substantial demand for commodities from China’s end to support its domestic consumption as well as export requirements. With the weakening of foreign demand and internal consumption, China’s export demands have considerably weakened, leading to declining prices of export-related commodities and resulting in an adverse impact on emerging markets’ GDPs.

Is the Slowdown for Real?

China’s economic slowdown has not only been reflected in its modest GDP growth figures, but also in several other negative trends that have been observed. These include a continuous decline in the percentage of fixed-asset investments as a part of China’s GDP. Investments contracted from 24.8% in 2007 to 19.6% in 2013. Reduction of fixed-asset investments is likely to negatively contribute towards a country’s economic slowdown by adversely affecting sectors such as real estate, infrastructure, machinery, metals, and construction.

Moreover, yuan has depreciated against US dollar (with average exchange rate of 7.9 in 2006 down to 6.26 in April 2014). In addition to this, Purchasing Managers’ Index (PMI), which is a composite index of sub-indicators (production level, new orders, supplier deliveries, inventories, and employment level), has plunged from 52.9 in 2006 to 48.3 in April 2014, below the middle value (50), thus indicating some contraction of China’s manufacturing industry. This industry contributes significantly to China’s GDP, therefore, the industry’s deterioration has a direct adverse effect on China’s economy.

This negative twist in China’s economic growth story is believed to be a result of a synergetic effect of various internal and external factors, some of which include:

Over-reliance on abundant supply of low-cost labor. For decades, China has based its growth on production of goods requiring high amount of cheap manual labor. However, as the economy continued growing, the demand for higher wages has increased, pumping up the labor cost. This cost is contributing to the inflation of products’ export prices, which is ultimately translating to a lower demand of Chinese goods.
The focus of Chinese workforce has been shifting from rural agriculture to urban manufacturing. The government has been taking steps to propel this transition in order to boost economic growth, prosperity, and industrialization. As more and more Chinese moved to urban areas, gradually, the transition has started yielding diminishing returns mainly due to saturation in the manufacturing industry.
Europe has also played a villainous role in China’s story. It has been one of China’s largest export markets but has recently been extending a significantly low demand for commodities and products from China. In 2007, the European Union accounted for 20.1% of all the exports from China. This percentage has fallen to 16.3% in 2012.

Chinese Leaders React

The Chinese government is in a reactive mode and has been unveiling a plethora of actions to bolster growth. The overall approach looks conservative in nature with a targeted GDP growth of 7.5% for this year, after recording a growth of 7.7% in 2013.

In an attempt to improve the situation, some of the expected financial and fiscal reforms are in the pipeline. Liberalizing bank deposit rates and relaxing entry barriers for private investment are some of the moves to be implemented by 2020. Various property measures (such as relaxing home purchase rules, providing tax subsidies, or cutting down payments) are planned to be introduced (based on local demands and conditions prevailing in a particular city) in order to balance the property market as a whole. A target of creating 10 million new jobs in Beijing has also been set for 2014. The underlying motive of all the rescue measures is strengthening the Chinese economy’s reliance on domestic consumption and services.

Influence on Emerging Markets

Undoubtedly, swing of the Chinese economy towards consumption and services is expected to considerably affect all the connected economies, several of them being emerging markets economies (EMEs). Commodity producing emerging markets such as Latin America, Middle East, parts of Africa and Asia are likely to be affected. Within this group, metal producers will probably suffer the most, as China had a significant demand for iron ore, steel, and copper during its investment boom phase. Within this subgroup, economies which are running current account deficits are forecast to be more susceptible to the ill-effects of China’s economic slowdown.

As China tilts towards domestic consumption, Latin America has started to witness a dawdling growth as the region’s growth rate dropped from an average of 4.3% in the period of 2004-2011 to 2.6% currently. For instance, as Chile depends heavily on copper exports to sustain its economic expansion, the country has been regularly reporting sluggish growth rates (5.8%, 5.9%, and 5.6% in 2010, 2011, and 2012, respectively) due to the decline in the price of copper, largely fueled by a lower demand from China. In addition to this, Brazil and Mexico are struggling to survive through falling benchmark stock indexes. The fall is mainly due to declining prices of commodities, as exports to China from Brazil and Mexico have weakened.

Middle East will probably register both positive and negative effects of China’s economic slowdown. One of the ill-effects could be reduction in oil prices, from US$140 per barrel in 2008 to approximately US$80 per barrel by the end of 2014, due to China’s lower demand of oil. On the positive side, Middle East is strengthening its position as an attractive region with long-term growth since China is being considered as a slightly less attractive option for investment by a majority of investors. This is mainly due to Middle East’s good infrastructure and accelerated development of industries such as defense, chemical, and automotive, and not only traditionally developed energy and petrochemicals.

The impact on African countries is expected to be negative primarily due to declining commodity prices. As Africa’s growth substantially depends on its exports to China, some African commodity exporters, such as Zambia, Sudan, and Angola, have started to feel the strain as China’s demand for commodities is weakening. This weakened demand has led to lower prices of commodities such as aluminum, copper, and oil, which registered a y-o-y decline by 4%, 9.5%, and 5.4%, respectively in January 2013. Zambia is likely to receive the strongest hit as copper constitutes almost 80% of the country’s total exports and reduction in copper prices could make its current account deficit to account for almost 4% of GDP in 2014.

Effect of China’s economic slowdown will vary from country to country in case of Asia. Countries such as Indonesia and Philippines, which have significant domestic demand, would be less adversely affected as they are less dependent on commodities exports to China. China’s unstable economy has spurred new investments in other growing Asian economies such as Cambodia. India is also likely to benefit from the ability to import oil at lower prices, which are pushed down by China’s weakened demand for oil. At the same time, however, export of cotton and metals such as copper and iron ore from India to China is dampened, adversely affecting India’s economy.

While EMEs have already been witnessing a lower demand from their traditional trading partners such as European Union and the USA, China’s slowdown will be an added burden to their economies.

It’s Touch and Go

It is rather evident that Chinese economic slowdown is having an adverse impact on emerging countries across Africa, Asia, and Latin America. One can hope that the measures taken by the Chinese leadership to curtail the slowdown will soon start taking effect and gradually lift up the economy, and in doing so, control the extent of damage spilling over many emerging countries and their economies.

In the event that the Chinese economy is unable to recover from this period of slowdown soon, it will continue to be a terrible blow to the economic ambitions of several emerging markets, especially those in Africa and parts of Asia-Pacific, which are heavily reliant on Chinese investment and trade relations.

Simultaneously to absorbing fewer production inputs imported from emerging countries, it is worth noting that China’s role in world economics might start to alter as it transforms to a consumption-led economy. This transformation is likely to slowly increase China’s appetite for imports of products and services, apart from traditional commodities-focused imports. It will be interesting to observe whether and how some of the emerging economies will attempt to satisfy this new Chinese hunger for goods extending beyond simple commodities.

04/02/2014by EOS Intelligence EOS Intelligence No Comments

Vietnam’s Macroeconomic Environment: FDI Paving the Way for Growth

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2013 was the sixth consecutive year since Vietnam first witnessed macroeconomic instability. With high inflation levels, a collapse of the banking system, and relatively lower growth levels compared with its Asia-Pacific peers, the economy faced immense pressures. However, thanks to continuous efforts by the government to uplift the economy as well as the presence of several inherent benefits that Vietnam offers to foreign corporations, the economy has been resurging, largely on the back of soaring FDI.

Vietnam has faced several economic pressures since 2008, which resulted in high levels of inflation, stagnated growth, and a crumbling financial system primarily led by rising bad debts and loss of liquidity. This also brought a negative impact on the real estate sector and its periphery industries. Over the past few years, the country has struggled to find its ground and has undertaken several policy measures to instigate investor interests. In fact, the Vietnamese government is largely focusing on increasing FDI investment levels and exports as the key tools to pull its economy out of stagnation.

The government made substantial moves with regards to economic policies. These initiatives, which led to a boost in the country’s FDI in 2013, included:

Equitization of 573 state-owned enterprises (SOEs), wherein foreign investors are eligible to hold stake in SOEs with few conditions
Tax allowance that reduces corporate income tax from 25% to 22% from January 2014 and further to 20% in January 2016
The approval of a scheme to enhance FDI management in Vietnam

These efforts by the government appear to have started yielding results, as the registered FDI rose by 95.8% to US$13.1 billion during the first 10 months of 2013, and the disbursed FDI rose by 6.4% year-over-year to $9.6 billion for the first 10 months of the year.

In addition to these initiatives, the government has stepped up to strengthen the country’s banking sector since 2012. Over the past two years it has significantly reduced average lending rates, equitized four state-owned commercial banks, and set up Vietnam Asset Management Company, a state-owned company created solely to purchase bad debt from existing banks in order to clear their books. This company purchased bad loans worth about US$1.6 billion in 2013. In an effort to further speed up the restructuring of the banking system, the government announced that it would increase the allowed limit for foreign strategic investors to invest in a domestic financial institution from 15% to 20% in February 2014.

The government efforts to stimulate FDI have also been supplemented by the existence of several positive intrinsic factors that Vietnam boasts off. The country remains an attractive investment destination thanks to its abundance of natural resources and cheap labor availability (according to JETRO report, monthly pay for general workers in Vietnam is about 32% of levels in China, 43% of that in Malaysia and Thailand, and 62% of that in Indonesia). The country also offers a young and dynamic consumer base domestically, as well as favorable conditions and location to supply within the subcontinent. It also enjoys a stable political environment, a significant advantage over several of its neighbors.

The resurfacing of negotiation talks regarding Vietnam becoming a member of The Trans-Pacific Partnership (TPP) is also positive news for the export sector, which is expected to receive a significant boost with the signing of the agreement (especially in the area of garments, footwear, and wooden furniture). This will also ease investment inflow in Vietnam from other TPP members.

Backed by the aforementioned factors and a robust young population, several sectors in the country are registering a double digit growth and intensified attention from foreign investors.

Vietnam’s aviation sector, for instance, is expected to be the third-fastest growing sector globally with regards to international travel and freight, and the second-fastest with respect to domestic travel in 2014.
The electronics sector has also witnessed keen interest from foreign players. Nokia, a leading telecom handset player, opened its first factory in Vietnam in 2013. Samsung and LG have announced plans to build factories in the country primarily for export purposes.
Retail, consumer goods, and tourism are some of the other best performing sectors with strong growth potential in the near future.
Moreover, in anticipation of the TPP agreement, Wal-Mart is also exploring investment opportunities in Vietnam that would entail sourcing of several products, such as clothing and footwear, entertainment, home appliances, toys and seasonal goods.

It is clearly visible that Vietnam is on the right path of growth and expansion, nevertheless, there is still a long way to go. While the FDI levels rise, the government has to channelize this investment to develop support industries and high-quality workforce to sustain growth. Moreover, while Vietnam enjoys abundant natural resources and cheap labor that attracts FDI, these factors remain exhaustible, especially in the light of new investment hotspots (such as Myanmar) emerging. Therefore, in addition to just focusing on economic policies, Vietnam must work towards creating better investment climate to lure FDI. The country’s legal framework still presents several hurdles to foreign investment and the country ranks very poorly on the global corruption index (114 out of 177 countries). While it is almost certain that Vietnam will continue to see an inflow of foreign investments, it is to be seen if it can use this to achieve sustainable growth for its economy.

05/09/2013by EOS Intelligence EOS Intelligence No Comments

Strike On Syria – Potential Impact On Emerging And Frontier Markets

Though there is still uncertainty of the US military action on Syria, global markets seem to have already given an indication of what could be in store if it actually happens. Crude oil prices rallied in the last week of August amid indication of strike, followed by a fall in oil futures, as the fear of imminent action receded. In another instance, share markets showed signs of panic due to a false alarm regarding missile attack on Syria (which eventually turned out to be an Israeli missile testing exercise).

The possible US strike on Syria has implications for global economy, and specifically for emerging economies, which are experiencing economic slowdown. The situation could be a tough test for countries such as India and Indonesia, as both of them struggle to keep trade-deficit under control, and are under the watch of credit rating agencies. For countries such as Brazil and Mexico, the US action may lead to delayed economic recovery. For Russia, being one of the largest oil producers, political implications are more than the economic one in case of a unilateral US action (i.e. without UN backing) on Syria.

While a sense of uncertainty and urgency prevail globally, we take a look at what potential impact the strike might have on select emerging and frontier markets.

18/01/2013by EOS Intelligence EOS Intelligence No Comments

Can Poland Remain A ‘Green Island’ Amid Crisis-struck Europe?

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Since 2008, the economic crisis has been the subject of countless news headlines across the world with numerous economies sliding towards the verge of painful recession. Europe has been severely hit as well, with only one state, Poland, performing considerably better than those once believed to be more stable and better prepared for potential turmoil, resulting in the Polish economy being dubbed the ‘green island’ among weaker, crisis-ridden EU states.

As the economic crisis wave spread across the globe in 2008, it hit virtually all economies. The slowdown was visible in form of declining economic growth rates, which soon changed into negative growth in economies of Europe, USA and Japan. Interestingly, Poland was the only economy in the EU to register a positive growth during 2009, and, despite visible slowdown due to recession hitting its trading partners, Poland has managed to storm though the crisis reasonably well.

Since the onset of the crisis, Poland’s good economic performance has surprised many analysts. Obviously, the country did not remain unaffected, and a look at a trend line of the country’s growth rates over the past decade clearly shows how its performance has mirrored EU’s economic struggles. Nevertheless, the Polish economy managed to grow throughout the crisis, and this year, again, as the EU economy is expected to shrink by 0.3%, Polish economy is expected to expand (though modestly). Poland’s position in terms of GDP per capita increased considerably by 11 percentage points, to 65% of EU’s average in 2011. The economic growth and persistence in defying the crisis is believed to be largely underpinned by strong internal consumption, as Poles took long to believe that the crisis could have an actual impact on them, thus did not cut down on their expenditure (e.g. in 2011, the Polish retail sector enjoyed one of the highest y-o-y growth rates in retail sales during the December holiday season in Europe, second only to Russia). This strong internal consumption, paired with attractiveness for foreign investors in production-oriented sectors, along with postponed entry to the Euro zone (a fact that has helped shield Poland from Euro quakes) and limited household and corporate debt, allowing for greater stability of banking assets – these factors are typically cited as reasons for Poland’s good performance amid the crisis.

However, there seems to be an air of negativity and the country might get its share of the crisis after all. Just in November 2012, the IMF and Morgan Stanley slashed Polish GDP 2013 growth forecasts by almost half, down to 1.75% and 1.5%, respectively, as rather modest export gains are expected to fail to offset weaker consumer spending. Indeed, private consumption boom is likely to significantly cool down, as for an average Polish citizen the situation does not appear bright. The mood amongst Poles seem to no longer reflect the earlier enthusiasm, with opinions that good performance of Polish economy is now more of a government propaganda, since what they see on a daily basis contradicts the positive overtone of analysts’ words. The change in moods has been already captured – in November 2012, the Indicator of Consumer Trust (BWUK) was down by 5.3 percentage points over November 2011.

In reality, Poland’s position in EU’s GDP per capita statistics improved more as a result of a decline of the EU average, rather than actual improvement in Poles’ incomes and standard of living. The accumulated negative impact of adverse situation in the country’s Euro zone-based trading partners, leads to increased cautiousness of firms, who are introducing cost control measures, including layoffs. Rising unemployment (registered unemployment reaching close to 13% overall and as high as 28% amongst graduates in November 2012), together with growing fear of losing jobs, as well as limited credit activity, seem to have put brakes on consumer spending and thus internal consumption, an element once considered as one of the fundamental forces allowing Poland to withstand the pressures of the crisis. The mood is increasingly pessimistic, and the Poles have now started to change their shopping habits – they buy less, think twice, postpone high-value purchases, downgrade to cheaper equivalents and demand higher value for money. Poles are finally increasingly aware of the economic storm going through neighbouring economies, and realize that they do not live on a safe ‘green island’ any more. This fear is escalated by recurring news and discussions filled with warnings of 2013 brining the crisis full-on to Poland. And what is definitely not helping is the opposition leaders’ lack of political will to constructively work with the government in averting the impending crisis.

Many economists urge Poles to remain calm and claim that there is no reason to panic (at least, not yet). Though the slowdown in economic growth is a fact, consumers’ calm approach is definitely recommended, as fear of the future might multiply the slowdown, resembling a self-fulfilling prophecy. But, one has to keep in mind that consumption levels, strongly correlated with consumer sentiments, has no capacity to remain the single force driving economic growth. Several cushions that previously protected the Polish economy slowly cease to exist – continuous, high value public spending, favourable VAT, weak currency that supported Polish exporters and high inflow of EU funds to sponsor infrastructure investments are becoming a story of the past. In this negative scenario, consumers’ wishful thinking, positive attitude and frequent shopping trips might turn out far too weak to lift Poland’s economy as Europe and the Euro zone continue to sink.

It seems that the story of the ‘green island’ may not remain true for long.

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WORLD ECONOMY

BREXIT: First Thoughts

Zika Virus Headed To Europe: WHO Alerts Several European Countries

Anatomy of a Bubble – Case Study: China

The West vs. Russia: Will Russia Really Survive The Impact Of Sanctions?

A Dragon Unfurls its Wings – How China’s Economic Slowdown Is Rippling Through Emerging Markets

Vietnam’s Macroeconomic Environment: FDI Paving the Way for Growth

Strike On Syria – Potential Impact On Emerging And Frontier Markets

Can Poland Remain A ‘Green Island’ Amid Crisis-struck Europe?