Trade in services is the most important category of the current account. Thus far it has been fully offsetting the balance of foreign payments, which are mainly associated with the transfer of profits from direct investments (FDI) carried out by non-residents. This resulted in the recently observed surplus in Poland’s current account.
The data for the Q4’19 indicate that the value of Polish exports of services amounted to EUR16.5bn, which resulted in a large positive balance in the amount of EUR6.4bn. However, a significant slowdown can be seen in the trade in services. Despite the fact that the last quarter of the year is typically characterized by higher average demand, Polish exports of services only grew by 3.9 per cent. This was one of the weakest results recorded since the end of the global financial crisis (with the average rate of growth since 2012 amounting to 7.7 per cent). The imports of services performed even worse, as the value of foreign purchases decreased by 1.6 per cent (the last decrease in imports of similar magnitude was recorded back in 2013).
Several overlapping reasons
The first was the slowdown in international trade in goods. In the Q4’19 the value of Polish exports of goods increased by 3.9 per cent y/y, that is, at a rate over two times slower than the average in the three preceding quarters. This reflected a further reduction in the rate of growth of the trade turnover in the European Union. The weakening of European import demand for Polish goods in 14 EU member states led to a decline in Polish exports by an average of 0.1 per cent, while the previous three quarters were characterized by a slight upward trend in this regard. Even deeper drops can be observed in the imports of goods into Poland. Over the course of the last three months of 2019 the value of foreign purchases of goods increased by 3.7 per cent year-over-year, which meant a significant decline in the rate of growth compared with 2018 (10.7 per cent). Such a significant decrease in the nominal rate of growth of Polish foreign purchases resulted both from the weakening of the real rate of growth of the Polish economy, as well as the drop in the rate of growth of transaction prices compared with the previous year.
The slowdown in the trade in goods resulted in a weaker performance of the Polish road transport sector. In the Q4’19 this service category was still among the most important services exported abroad (the value of such exports exceeded EUR2.5bn), but the recorded increase in its value (EUR180m) was not as impressive as in previous periods. In the previous quarter the increase reached nearly EUR224m, and in the year before (that is, in the fourth quarter of 2018) it was almost 50 per cent higher and amounted to EUR314m. Meanwhile, when it comes to imports, Polish companies were purchasing almost the same amount of road transport services abroad as in the previous year (an increase of merely 1 per cent). The fact that Polish spending on foreign transport services recorded near zero growth may be all the more surprising if we recall that until now services from this category were listed among those most important in the context of the overall increase in the Polish imports of services.
The decrease in the intensity of trade in goods and the decline in the intensity of international transport have led to a drop in the trade in processing services (services performed on goods entrusted by other entities, e.g. painting, packaging, bottling, etc.), whose trade balance amounted to EUR942m. This was the worst result in nearly five years, while the balance of trade in such services has never before recorded a decrease in the fourth quarter of the year. This was mainly due to the virtually unchanged value of exports and a simultaneous increase in the value of imports by EUR90m.
The second major factor in the declines observed in the trade in services were capital relations between Polish residents and foreign companies. The turnover in Polish trade in services on the international markets are mainly dominated by companies that have capital relations with foreign entities.
They are therefore characterized by remarkably high import intensity. The position of Polish companies in the global value chains is the main determinant of the volumes observed in the exports and imports of services. Due to the weakening of the trade exchange between related entities in the Q4’19, Polish exports of “other IT services” grew by EUR224m, which accounted for only 2/3 of the increase observed in the preceding year. In turn, Polish exports of telecommunications services decreased by 39.4 per cent. The sales of economic consulting services, which have been a pillar of Polish foreign trade for a long time, increased by a solid amount of EUR180m, but the rate of growth was far weaker than the average observed in the period from January to September (22.2 per cent compared with 26.0 per cent observed in the first three quarters). Further declines can also be found in the category of construction services, including both those provided domestically (a decrease of 39.0 per cent) and abroad (a decrease of 6.9 per cent). One major surprise is the decline (although by just 1.2 per cent) in the value of charges associated with the use of intellectual property, including trademarks, most frequently purchased by subsidiary companies which spend significant amounts on this. A similar situation was last observed in the Polish economy in late 2015.
Another issue worth discussing is the geographical structure of Polish trade in services. Germany turned out to be the most important trading partner in the case of exports. It was precisely the exports to Germany that grew the most in the Q4’19 (by EUR360m). However, this growth was not as large as that observed in the first three quarters, as well as in the preceding year. Another country purchasing a lot of Polish services was the United Kingdom. However, a closer observation of the British market reveals a gradual weakening in the rate of growth of Polish exports heading in that direction (an increase of 12.0 per cent compared with 22.0 per cent in 2018). This may be due to Brexit and the lingering uncertainty regarding the conditions of future supplies to that market. A reduction in the intensity of foreign sales was also recorded on the markets of the United States (an increase of 11.0 per cent compared with 23.0 per cent in 2018) and the Netherlands (an increase of 9.0 per cent compared with 23.0 per cent in 2018).
The situation was much more interesting in imports, where the most significant growth rates were recorded in the trade exchange with Switzerland and France (a rise of 9.5 per cent and 5.4 per cent, respectively). The most unexpected development was the decline in imports of services from Germany (which mainly related to reinsurance services, expenses of seasonal workers, software-related services, road freight transport, architectural and construction services). This is only the second such decline on record (the first occurred in the third quarter of 2013).
What will the current crisis bring?
The current situation on international markets points to a further weakening of the trade in services. In light of the restrictions due to the pandemic and the temporary reintroduction of customs borders a weakening of Polish trade in services can be expected, both on the side of exports and imports. The lockdowns forced companies to reduce or suspend their economic activity. There is no doubt that this will have a negative effect on the productivity of the entire services sector, and, consequently, also on the achieved sales values (including foreign sales).
Meanwhile, the reintroduction of controls on internal borders within the EU primarily affected the mobility of workers and consumers. According to the Eurostat, these measures primarily affected trade exchange related to foreign travel, processing, construction services and transportation.
On the one hand, much lower revenues of the Polish tourist industry, but also significantly reduced expenditures incurred by Polish citizens on this account should be expected. On the other hand, the business travel expenses of both Polish citizens and foreigners will certainly fall even after lifting the travel ban within the EU. In this case, a negative impact on this category of services should be expected in the Polish balance of payments.
Also weaker results in road freight transport should be expected. After the reintroduction of controls on internal borders, there were initially some problems with supplies of goods within the EU. Due to the current situation in China, supply chains that have been functioning well thus far started breaking down, and the movement of goods was exempted from stringent control procedures. The EU mobility package, which is being worked on despite the pandemic, certainly does not improve the situation of the international transport industry.
It seems, however, that not all services will suffer. The restrictions on movement could boost sectors such as IT, a part of the entertainment industry associated with streaming, etc., as well as educational services provided online. These categories of service activities are characterized by low costs and the ability to easily change the business profile in order to allow for a more efficient utilization of the remote channel for the delivery of their products.
The views expressed in this article are the private views of the author and are not an expression of the official position of the NBP.