Poland shakes off slump

By bne IntelliNews March 31, 2014

Jan Cienski in Warsaw -

In what is becoming something of a pattern in recent years, Poland is again set to post some of the EU's fastest economic growth rates this year and next – a sign that central Europe's largest country has shaken off last year's slump.

In its latest economic forecast, the European Commission estimates that Poland will see GDP growth of 2.9% in 2014 and 3.1% in 2015 – that makes it the best performer among the EU's larger countries.

“I think we can be optimistic,” says Marek Belka, the governor of the National Bank of Poland. “Poland does not really suffer from any economic imbalances. We don't need any sort of a dramatic budgetary tightening. We don't have a problem with an excessive current account deficit. Debt, both public and private, is moderate.”

Poland most recently showed its unexpected economic resilience in 2009, the year when it was the EU's only economy not to fall into a recession. After that, as the Eurozone struggled to stave off a collapse and other emerging European economies were hammered by falling exports and budgetary problems, Poland's resilient consumers and strong export sector kept the economy purring.

The wheels almost came off last year, when the economy posted a lacklustre expansion of only 1.6%, as consumers stopped shopping in order to rebuild their tattered savings accounts. What little growth there was came mainly from net exports.

But by the end of  last year growth was again accelerating after coming in below 1% in the first half of the year as domestic demand and investments both returned to life.

As growth has returned, inflation is still very low – only an annual 0.7%, far below the 1.5% marking the bottom bound of the central bank's inflation threshold. Inflation is only expected to hit the bank's preferred rate of 2.5% next year. That means rate hikes from today’s record low 2.5% benchmark rate are unlikely this year.

“I see this year as a year of stabilisation,” says Belka.

With growth rebounding, unemployment is finally beginning to drift lower, hitting 13.9 per cent in February, down from 14 per cent a month earlier.

Solid foundations

The recovery now appears broad enough to be sustainable over the longer term, says William Jackson, emerging markets economist with Capital Economics. In a new analysis, he finds that Poland's growth has solid foundations.

The first is that the bulk of Poland's trade is with Germany, where Polish factories have become an indispensable part of the German supply chain. With Germany’s economy now expected to grow 1.8% this year and 2.0% in 2015, Poland's is being pulled along in its wake.

Investment is also recovering, as banks are becoming more willing to lend and the next EU budget again opens a spigot of structural funds flooding into Poland.

Those factors, together with rebuilt household savings, which will allow consumers to start spending again, coupled with low inflation and falling unemployment, have Mr Jackson predicting a robust recovery.

“All of these reasons suggest that the recovery in the Polish economy over the next few years could be stronger than most seem to expect,” he writes. “Of course, the economy remains vulnerable to a fresh relapse in growth in the euro-zone, and in Germany in particular. But assuming this is avoided, we think Polish GDP could grow by 3.5% this year and next. These forecasts are above the consensus and would make Poland the fastest growing economy in Emerging Europe.”

That does not mean that there is nothing for the government to do.

Poland is still in the European Commission's excessive deficit procedure with the 2013 deficit at about 4.4% of GDP, far above the Commission's maximum of 3%. But with the finance ministry pencilling in a conservative estimate of only 2.5% growth in its budget calculations for 2014, Mateusz Szczurek, the finance minister, expects the country to have little trouble hitting deficit targets of 3.3% in 2014 and 2.9% in 2015.

Reforms needed

The short- and medium-term outlook looks optimistic, but problems loom over the longer term.

Szczurek notes that Poland's poor demographics, with high migration, an ageing population and very low birth rate, will cause huge challenges. “I think that over the next years demography will start to work against us,” he says.

That is spurring calls for greater enthusiasm for often politically difficult economic reforms. Poland's governments in the early 1990s set the groundwork for the successful transition from communism to a market economy, and a fresh burst of reforms at the turn of the century are responsible for strong performance in recent years. However, the centrist government of Prime Minister Donald Tusk has been more preoccupied with saving the country from the global economic crisis than with further deep reforms.

That will have to change if Poland is to continue catching up to west European living standards, says the OECD, the club of rich countries, in its latest report on the state of the Polish economy.

Poland's main focus should be on making its labour market much more effective, said Angel Gurria, the OECD's secretary general, in March.

“Poland has made considerable progress in transforming the structure of its economy, making it more competitive and bringing about convergence in living standards with other European countries,” he told reporters. “Despite this success, unemployment is still far too high, and restrictive product market regulations continue to hinder economic activity. Reforms are needed for Poland to build on its strong track record and launch itself as an innovation–based economy.”



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