Confronting the Economic Crisis

The world economic crisis, which fully manifested itself on the global market last year, has been the source of much-heated debate. The Polish economy, which until recently was experiencing an unprecedented boom, is nowadays entering a slowdown. The first symptoms of the aggravating situation can be noticed in widespread redundancies, restrictions on production, limited possibilities of promotion, an increase in prices and the weakness of the Polish zloty.

In the second half of last year, signs of the crisis began to be felt in Polish cities, including Krakow. The 2008 economic balance of the city has turned out to be generally unfavourable. Tourism – a significant contributor to the overall local economy – was clearly most affected.

The tourist industry noted a significant decline in the number of visitors to Krakow as of last summer. A strong zloty combined with high prices for basic services associated with tourism meant that Krakow ceased to be competitively cheap in comparison with other cities. As a result, the number of Germans, Americans, Italians and French visitors, to mention just a few nationalities, diminished. The most frequent visitors were still the British, who constituted 20 percent of the total number of foreign guests, but even this group, which has become notorious for “stag parties” and booze weekends, slightly lost its enthusiasm due to high prices for such essentials as beer, coffee, taxis or hotel accommodation.

Grazyna Leja, a representative for the Tourism Affairs and Marketing Board of Krakow, commented on the existing situation: “The fall in tourist activity can be observed in the whole world. This branch is usually the first one to suffer the consequences of any financial crises.”

This was especially noticeable in December. Christmas stalls did not attract such a large number of customers as they used to. During New Year’s Eve some hotels had spare rooms since fewer foreigners decided to celebrate the New Year in Krakow in comparison to previous years.

The report compiled by the Małopolska Tourist Organization (MTO) summarising last year reveals that Krakow was visited by 7.5 million people, which is less than in 2007, when 8 million visitors arrived in Krakow. According to MTO, the number of foreign tourists decreased by 14 percent due to substantial currency fluctuations, an increase in fuel prices and difficulties for Eastern European tourists in getting visas.

Adrian Tomasik, the manager of Academic Hotel Centre confirms this information: “Last year we evidently experienced the crisis from both directions ? the West and the East. Tourists from the West did not come because the currency conversion rate was not profitable for them. Therefore they were choosing the countries of Southern Europe where conversion rates were more beneficial. We also had fewer Russian visitors due to the introduction of Schengen visas,” he says.

Since the British are the largest group of all the nationalities coming to the city, one must also consider their country’s economic situation. The crisis of the financial system that hit Great Britain last year has ended 16 years of continuous economic growth and has severely affected British consumers. Many households were forced to reduce their expenditures and a substantial number of companies curtailed investments. While some companies announced massive lay-offs, others announced their plans to follow suit.

The difficult situation of British consumers contributed to the decline in the number of foreign trips. The data revealed by the British Airport Industry shows that passenger numbers at Britain’s busiest airports fell. During the last few months, passenger figures were down by several percent compared with the same period in 2007. The pound’s value against the euro and dollar was the main reason why fewer Brits decided to fly out of the UK at Christmas.

Krakow’s airport was also afflicted by the downward trend in the tourist industry. Statistics indicated a falling tendency as of last spring, resulting in a loss of four percent of the total number of passengers serviced at the end of the year. Balice Airport managed to maintain quite a good network of connections in the second half of 2008 despite losing some airlines.

Tourism was not the only branch to suffer due to economic problems ? the figures also showed a drop as far as the real estate and construction industries were concerned. The crisis has created a difficult real estate situation in the whole country, mainly due to difficulties in receiving credit. Polish banks reacted immediately and put severe restrictions on giving mortgage credits, in an effort to avoid the fate of American financial institutions. This introduced a requirement for customers to provide a substantial down payment when buying their apartment.

“I’m having my house built and I can feel the effects of the crisis,” says Beata Gawor, who has not been able to receive credit for four months. There are many potential property buyers facing a similar situation, the great majority of whom constitute young people, who cannot afford to realise such a serious purchase without credit.

Real estate prices declined in all Polish provinces and one of the most substantial falls was noted in Krakow. In December the average price of a flat dropped below seven thousand zloty per metre. At 6,980 złoty the price became comparable to that from November 2006. Last year, prices in Krakow fell by 11 percent. As opposed to other Polish cities, in Krakow it was small “bachelor” flats that felt the most significant loss in value. In addition to flats, the average price of a square metre of a building site also dropped, by 12 percent. The areas in Krakow that noted the most significant fall were Srodmiescie and Podgorze, whereas Krowodrza was least affected.

However, difficult times for the real estate market manifest themselves not only in the fall of prices but also in the decline of the number of transactions. As a result there are several thousand flats to be sold and practically all new investments in Krakow have been suspended. Investors are waiting for an upturn in the economy, whereas some companies hope that such actions like “the sale of the year 2008” will help to remedy the situation. Some companies have even introduced an option to allow those customers who could not receive a bank credit to purchase an apartment.

Likewise, the labour market did not remain immune to the changing situation in the global economic scene. Over the last few months the number of job offers diminished in all cities, including Krakow. Employers in Poland reacted immediately by demonstrating much more caution in engaging new employees. According to some experts the fear factor played a crucial role here, since the situation on the Polish labour market did not change in such a significant way as to cause a fall in vacancies.

Last year, some private companies also started to experience the first signs of a worsening situation, mainly due to a drop in orders for their services. “I haven’t been touched by the crisis yet,” says Adam Orczyk, a graduate of the Academy of Mining and Metallurgy in Krakow. “However, the crisis has hit a company which deals with goods haulage, where my uncle works. The crisis abroad has led to a drop in orders for product deliveries. As a result, Polish companies are not placing orders for transporting goods abroad. In this way the crisis is becoming more widespread.”

However, while numerous sectors of the economy are suffering or are threatened, there are some for which the economic slowdown may have a brighter side. Even during difficult times people will have to eat and clothe themselves. Some experts claim that fast food producers will actually see gains, since in order to save money people will resign from expensive restaurants in favour of cheaper options. For the same reason, chain shops like Biedronka or Lidl, which offer cheaper products, can benefit from the situation. Producers of chocolate such as the Cracovian company Wawel are also positive about the future, since in difficult times people are likely to eat more sweets, which improve their mood. Recently, they have begun to expand their product line, and are planning new investments and even an increase in employment.

Some people are trying to predict future trends in the Polish tourism industry and economy and what further developments in these fields will look like. “It is difficult to judge,” says Adrian Tomasik. “However, the reservations we have made allow us to have an optimistic forecast. The travel agencies we cooperate with also have a lot of bookings.”

In addition, the London government predicts that a flood of British tourists will again visit Poland this year since the zloty has become weaker.

Magda Nowak, an employee in one of the outsourcing centres, is rather optimistic about the future. “It seems to me that Poland will not experience the crisis in such a severe way as the U.S. or Ireland since our companies have already begun to lead a careful policy, which can be seen with the example of banks, which do not give such a large amount of mortgage credits as they used to. We should not expect our economic situation to improve this year, but the situation should be more stable than in 2008, because nowadays everyone is conscious of the crisis and people will bear this in mind when taking decisions.”

When the crisis started sweeping across individual countries in the world, Poland found itself in a relatively safer situation compared with other Central and Eastern European countries. And as news spread in late January that the UK was officially in recession for the first time since 1991, Polish authorities tried to reassure local companies and its citizens that Poland was still financially viable. It remains to be seen if this will be enough to overcome the problems that Polish local economies are about to face.