WARSAW (Reuters) - Poland's retail sales took their steepest dive in almost eight years last month, suggesting the economy is at growing risk of recession and putting pressure on the central bank to cut interest rates faster.
Strong domestic demand has helped Poland's economy keep growing even when its European Union neighbors were in recession, so the retail figures have fed predictions Poland's economy could shrink for a quarter or two this year.
Data from the statistics office released on Thursday showed retail sales in December fell 2.5 percent year-on-year, in a month that is traditionally strong for retailers because of heavy spending on food and gifts around Christmas.
That would be a blow for a country which has managed two decades of uninterrupted growth, and is the only EU member to have avoided recession since the global downturn began more than four years ago.
Minutes on Thursday from the latest meeting of Poland's central bank showed that when policy makers approved a third consecutive 25 basis point cut earlier this month, taking the benchmark rate to 4 percent, they did not rule out further easing if economic data remained weak.
Poland is the EU's largest eastern economy and a sharp slowdown could affect its neighbors to the West, especially Germany. Polish businesses and consumers have up to now been generating demand for German goods and services at a time when Germans themselves have been buying less.
"This data is very bad and shows that Poland's growth probably stood at zero in annual terms or close to it in the fourth quarter," said Michal Dybula, a chief economist at BNP Paribas in Warsaw.
He was the first of a now growing group of economists who predict the economy may shrink early this year.
"The real income of Polish households is falling, the same with savings levels, and this bodes badly for consumption ahead," Dybula said.
Analysts say the sales figures should force the central bank not only to cut interest rates further but to do so quickly and deeply to try to cushion the slowdown.
The zloty currency fell 0.2 percent immediately after the retail sales figures were released, and bond yields were 2 basis points lower. The zloty continued to slide afterwards, nearing a five-month low at 4.197 against the euro.
Polish cities are dotted with new shopping malls, marking the retail boom since the fall of Communism in 1989. Supermarkets are even packed on Sundays, to the dismay of priests in this traditionally devout Catholic country.
Yet on many shopping streets, retail units now lie empty. Warsaw city government, a big landlord for retailers, has said it is cutting rents.
Economists say consumer spending has slowed because people are scared they could lose their jobs as the effects of the global slowdown finally filter through to Poland.
Spending on infrastructure projects, including roads, public buildings and sports stadia for the 2012 European football championship, had helped insulate Poland.
But now "we are in an atmosphere of gloom and doom," said Malgorzata Starczewska-Krzysztoszek from Lewiatan, the largest association of small- and medium-sized firms. "This was even true in December," she said, when Poles would normally be splashing out on Christmas purchases.
Anna Podniesinska has a family holding with businesses that include selling furniture, shoes, and high-end fashion.
"We've been doing business for 20 years and things are bad now," she told Reuters. "Things are tough everywhere. Retail is the worst, but the situation isn't much better in housing or furniture."
The role of the central bank is of particular importance because the government has committed itself to an ambitious target for cutting its deficit.
If the government broke with that target and used public spending to stimulate growth, investor confidence and Poland's credit rating could suffer. That leaves interest rates as the main instrument for helping the economy.
The Polish central bank's Monetary Policy Council next meets to decide on rates on February 5-6, and many people with a stake in the economy want it to take bold action.
"If the central bank cared for the economy, it should forget its cautious stance in policy and cut fast and deep. It should slash rates by 50 basis points next month," BNP's Dybula said.
(Editing by Christian Lowe and Ruth Pitchford)
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