Construction still on treacherous ground in 2011
It becomes increasingly obvious that construction has bottomed out, but at the same time recovery is not quite in sight. A new government-backed mortgage scheme ‘Prima casa’ prevented – up to a point – the local economy from falling further in 2009 and 2010, while the positive impact on the economy has been estimated at 0.2-0.4pp of GDP. Although we are rather skeptical about the rebound of the residential sector in 2011, despite all good intentions, we cannot completely rule out a possible ease into the positive territory, due mainly to a positive base effect.
Local managers expect construction to increase over the next few months, against a background of stable payrolls. However, the slightly improved outlook comes with higher prices and this is not good, at least as long as this sector is still pretty much depressed. The government has cleared the decks for long-delayed infrastructure projects that are likely to be launched in the second half of this year. It remains to be seen how the government will manage to keep these projects on track in the medium term, as long as multiannual budgeting remains just a concept and bearing in mind that objectives often change when a new government coalition takes office. We still see a higher potential for recovery on the commercial side of construction once the investment process resumes.
Retail sales outlook overshadowed by the persistence of high inflation.
Consumer confidence strengthened somewhat, but remains way below pre-crisis levels. After the significant wage cuts foisted on public servants last year as part of the austerity program, consumers are still fazed, even though the government raised the base salary in the public sector by up to 15% as of January 2011. The retail sales trend may have not been so negative if VAT had not been hiked to 24%, from 19% in last July, and, unlike the wage cuts, this move will not be reversed, as some might have expected.
The chart above is illustrative of how retail sales continued to sink in 4Q10, despite the fact that consumer confidence was nudging up. Average inflation quickened to 7.9% in 4Q10, while food prices reported the steepest increase during October-December 2010. Unlike local managers, who expect relatively stable retail sales over the next three months, we are a little more cautious inasmuch as the price level, even that predicted by the managers in the survey, will be on the rise and this, coupled with a feeble outlook for personal income, could weigh pretty heavily on many retail businesses.
Payrolls shrank, and so did registered unemployment.
This has been quirky for quite some time now, but the mystery of this unnatural trend is now uncovered, although officials from the Employment Agency did not make any comments. The registered unemployment tends to become increasingly meaningless as long as it continues to decline while payrolls continue to shrink. The registered unemployment rate shed more than 2pp in the last 12 months, reaching 6.6% in February 2011. It seems, however, that the decline was the result of a section of the unemployed – no longer receiving unemployment compensation – refusing to apply for new jobs.
The latest survey shows that local managers expect a certain stabilization of the labor market, and that the adoption of the new labor code, which is intended to increase workforce flexibility, could create more favorable conditions for overall employment, while enlarging the contributor base to the ailing social-assistance scheme. The registered unemployment rate is likely to decline further in the next months and we expect it to stand at around 6-6.5% in December 2011.