Macroeconomic update end-January 2016


It is clear that Poland’s economy had been left in reasonably good shape for the Law and Justice government as it took over in the autumn of 2015. The question now is, in which direction will the new government take the economy?

Will there be a strong focus on innovation, investment in infrastructure,  and simplifying bureaucratic procedures? Will tax- and excise gathering be improved through greater efficiency and investment in IT systems?  There’s enough uncollected (and evaded) VAT to pay for all election promises (lower retirement age, higher social benefits) if the government gets serious with tax collection. Failure to do so will lead to increased public-sector deficits and government debt – or unmet election promises.

Risk remains in the form of new taxes to be levied against banks and larger retailers, without much thought to the consequent fall-out (higher bank charges, greater pressure on suppliers and their employees).

Poland has a strong, diverse and sustainable economy, based on growing exports, domestic demand and manageable public- and private-sector borrowing. EU funds have also helped keep the economy buoyant. Looking ahead for the next 15-20 years, Poland's economy has the potential to continue to grow at a faster pace than that of western Europe, a point made in McKinsey & Company's recent report Poland 2025: Europe's New Growth Engine. Polish exports – linked to a great degree to Germany’s export powerhouse – will continue to grow at a faster pace than its GDP.

The fact that Poland reoriented its exports away from Russia and towards the EU back in the 1990s – and increasingly these days towards emerging markets – should make its economy more resilient to any shocks caused by a widening Russian trade embargo. Poland is home to very little Russian investment and has only minor investments in Russia. While Polish exports to Russia are down by over a quarter compared to their levels in the first nine months of last year, Poland has nonetheless managed to increase overall exports (by 7.2%) over that same time. [Jan-Sep 2015 compared to Jan-Sep 2014, in euro terms.]

Forecasts for this year are remain robust. At the end of 2015, the OECD forecast 3.5% growth, the European Commission 3.4% and Goldman Sachs 3.4%.

If we go back six years to October 2008 when the global economy tipped over the precipice, Poland’s economy was in sound enough condition, its forward momentum strong enough to avoid recession. And indeed, in 2009, Poland was the only EU member state to continue showing economic growth. GDP growth for the whole of 2009 was 1.6% higher than in 2008; the economy grew by 3.9% in 2010 and by a further 4.5% in 2011. Growth slowed down to 1.9% in 2012, then even further to 1.7% in 2013, before bouncing back to 3.3% in 2014 and an expected 3.5% in 2015.

The conflict in Ukraine is having a knock-on effect on Polish companies trading with Russia and with Ukraine. Trade with Russia has ever been haphazard, with embargoes on food exports, additional tariffs or non-tariff barriers being imposed then lifted at the drop of a hat. As it is, exports to Russia have been slowing (they represent just 2.9% of Poland's exports in September 2015 compared to 5.3% in December 2013). A reduction in gas imports from Russia could hurt Poland's chemicals sector; rising gas prices would affect consumer inflation.

Yet the Polish zloty has hardly reacted at all to the crisis. Current downward pressure (the zloty moving from the  €=4.25 mark towards €4.50) is seen rather as a reaction to the current government’s policies. Standard & Poor’s downgrade of Poland’s foreign currency debt to BBB+ prompted a change in sentiment towards the zloty, causing it to become even more undervalued (to the delight of Polish exporters).

Poland will receive over €83 billion from Brussels in the form of structural and cohesion funds for the 2014-2020 EU budget perspective, of which some €28 billion is earmarked for transport infrastructure. This – like money from the 2007-2013 budget – will have a significant positive impact on the Polish economy, and will greatly improve transport around the country, to the benefit of business.

Manufacturing output has picked up after a short contraction; once more it is driven by exports. Being Germany’s manufacturing outsourcing backyard, Poland’s industrial production is heavily dependent on Germany's export-led economy. Germany now accounts for 27.2% of Polish exports (Nov 2015), compared to 25.1% at the end of 2013; German importers  are taking up the slack from foregone sales to Russia. As well as Germany, the UK and the Czech Republic have also seen significant rises in Polish imports.

Trade figures for the first 11 months of last year show that Poland's exports and imports of goods are finely balanced, with a tiny trade surplus at  €3.7 billion appearing.

Poland has been experiencing mild deflation since July 2014; by the December 2015, prices were down 0.5% on the same month in 2014. Russian food embargoes are having the effect of dampening food prices in Poland as exporters seek domestic markets for their produce originally earmarked for Russia, while falling oil prices also are depressing prices. Further loosening of interest rates are needed to get closer to the National Bank of Poland's inflation target of 2.5%. Wages, however, are rising faster, with an 8.4% jump in the private sector in the year to December 2015.

The way Poland’s statistical office counts pay rises, industrial production and other indicators means that data is not collected from businesses employing nine or fewer employees. This means that a true picture of average wages, productivity etc, cannot be gained as over 90% of businesses are not included.

The Monetary Policy Council started loosening money supply by lowering base rates from a high of 4.75% (May 2012). In November-December 2012 and January-February 2013, the MPC made four consecutive 25 bp cuts, followed by a 50 bp cut in March 2013 and a further three 25bp cuts in May, June and July 2013, in response to weakening inflationary pressure. After three months of negative inflation, the MPC made a surprise 50 bp cut in early October 2014.  The latest 50bp cut announced on 5 March 2015 had been expected by the markets.

Poland’s largest age cohort will reach the age of 33 this year (all 690,000 of them!); this is Poland's demographic high-water mark. By contrast, the number of 13 year-olds is a mere 350,000, the low-water mark. Over the next decade, the number of young people entering the labour market will fall by an average of 17,000 a year.

However, the high quality of secondary education in Poland continues to encourage the BPO sector to invest in service centres in Poland, as does the high level of foreign language proficiency among younger Poles (Poland was ranked eighth in the world in the 2015 English Proficiency Index by language training company EF). And successive PISA reports by the OECD show Poland ahead of many Western European countries in terms of  literacy, numeracy and science.

The shock to national accounts of large numbers of post-war baby-boomers hitting pensionable age in the early part of the next decade (65 year-olds born after 1951) will be made worse by the extremely low number of Poles of pre-pensionable age in the labour market. Only 28% of Poland’s over-55s are economically active (compared to 58% in the UK). The Tusk government raised the retirement age to 67 for men and women, though the new government has pledged to return it to the previous 65 for men and 60 for women.

Falling rapidly from a high of 20.4% in February 2004, unemployment in Poland fell faster than in any major economy at any time in peacetime. By October 2008, it was officially 8.8%, though the BAEL measure used by Eurostat had Poland’s unemployment at 6.7% – this excludes those fictitiously registered as unemployed and working in the grey economy. October 2008 marked the lowest point in unemployment in recent years. Compared to the situation in the UK, western Europe and the USA, Poland's unemployment is lowest in the cities and highest in rural areas, with more than half of the long-term unemployed living in villages. By March 2013, unemployment had reached 14.3%, before starting to fall, falling back into single figures in August 2015, and 9.8% in December. Eurostat says that Poland's unemployment, measured by economic activity rather than registered joblessness, stands at 7.2% (November 2015), suggesting that around a quarter of those signed on are actually economically active within the grey sector. This compares with the UK, where registered unemployment is 5.4% while Eurostat’s measure of the economically inactive is 5.2% (November 2015).

The zloty
Although Poland had notionally signed up to joining the eurozone as part of its EU Accession Treaty, there was no mention of when, nor at what rate. To do so, Poland must first alter its constitution accordingly, which needs a two-thirds parliamentary majority. The new PiS government is even more reticent than its predecessor to enter the eurozone.

The euro crisis has put any discussion of Poland abandoning the zloty on hold for the foreseeable future. Poland, therefore, lingers on the fringes of the EU’s central core – and – importantly for its manufactured exports – it can control the competitiveness of its currency.

The zloty, which had been rising rapidly in value against the pound, the euro and dollar in the four years after EU Accession, suffered a major depreciation in the aftermath of the October 2008 financial crisis. Between August '08 and February '09, the zloty depreciated by nearly 40% against the euro. This made Poland far more competitive for inward investment and for export, and was one of the key factors that kept Poland out of recession.

Since February 2009, the zloty climbed back, though not to the unsustainable level of 3.20 zł = € experienced in August 2008. Throughout 2010 and into 2011 the zloty held steady at around the 4.00=€ and 4.50=£ marks. The euro crisis, however, have knocked the steam out of the zloty's stability. The wobbles on the markets caused by the threat of sovereign defaults in the eurozone and Hungary hit the zloty, knocking it back to 4.50=€ and 5.45=£. For much of 2012, however, the zloty has rebounded somewhat, stabilising at around 4.20=€ and 5.00=£ throughout 2013 and much of 2014. The Ukraine crisis barely affected the zloty's stability vis-a-vis the euro. However, uncertainty as to the economic decisions being made by the new PiS government have weakened market sentiment towards the zloty, knocking it back from 4.20=€ to 4.50=€ .

UK-Polish trade
Trade between the two countries has grown consistently over the past 17 years; 2011 went on to become the best for bilateral trade ever; the value of trade in goods between the UK and Poland in 2011 (£11.4 billion) was nearly double that for 2007. However, while there was continued growth in the value of Polish exports of goods to the UK in 2012, the value of UK exports of goods to Poland slumped by 15% compared to 2011. 2013 saw UK exports to Poland rebound somewhat, though still not exceeding the 2011 values.

2014 saw bilateral trade in goods between Poland and the UK plateau, with small drop in both directions. Yet Poland still has a large trade surplus with the UK (only with Germany does it have a larger one); Britain is Poland’s second-largest export market (after Germany) and its ninth-largest import source.

Author: Michael Dembinski

GUS, the government's central statistical office, has a small section in English that offers some indicators.
Central Bank of Poland


Author: Michael Dembinski Price: Content is free of charge