Polish growth to remain robust despite Eurozone and Russian weakness

By bne IntelliNews September 30, 2014

Jan Cienski in Warsaw -

For most of its history Poland has been trapped between Germany and Russia – usually with terrible results.

The same is true today. To the west, Germany and the wider eurozone are having trouble re-igniting growth and the currency union faces the threat of a triple dip recession.

To the east, Russia's military adventures in Ukraine have sent the Ukrainian economy and the hryvnia into a downward spiral, while Russia's economy is being squeezed by international sanctions.

That does create some potential dangers for the Polish economy, Standard & Poor's notes in a recent analysis of the Polish economy entitled: “Poland Faces External Risks To Otherwise Robust Growth”.

But, unlike in centuries past when Poland's neighbours were able to drag down and destroy the country, the effects from east and west this time around are likely to be muted – in large part thanks to the strength of the Polish economy.

“Standard & Poor's expects a robust macroeconomic performance from Poland this year and next. Rising domestic demand will underpin a return to higher growth rates, after a sharp slowdown in 2012 and the first quarter of 2013. Our forecast is for GDP growth of 3.1% in 2014 and 3.3% in 2015,” notes the ratings agency.

While the external environment is not benign, Poland is shielded by its large domestic market, flexible exchange rate and moderate labour costs. Low inflation means there will be a pickup in real wages which, coupled with gradually falling unemployment, should boost domestic demand. Finally, a spate of elections, beginning with local elections in November, followed by presidential ones next spring and a parliamentary vote in the autumn of 2015, mean that public spending is likely to loosen, again helping demand.

Although problems in the eurozone will have an impact, exports to the eurozone only account for about a fifth of Poland's GDP, much less than in smaller and more open economies such as  Hungary and the Czech Republic.

If the eurozone slump is much worse than S&P currently expects, Poland's growth could halve to about 1.6 per cent in 2015, but that is still far from a recession.

Direct fallout from Russia and Ukraine is also manageable. Moscow slapped restrictions on Polish exports a couple of days before extending them to the rest of the EU, and Poland stands to bear the highest cost of any European country – losing more than €1bn in trade – but the overall impact is still small.

S&P notes that “food exports to Russia account for only about 0.3% of Polish GDP, so that the macroeconomic effect of Russia's ban is rather small. Total merchandise exports to Russia and Ukraine were about 8% of Polish exports in 2013, or 3.2% of GDP, which is a non-negligible amount, but barring the escalation of sanctions and counter-sanctions between Russia and the West, the reduction in export volumes should not have a material macroeconomic effect.”

If the situation in Ukraine continues to deteriorate, then Poland could be hit by other effects, such as restrictions on Russian energy exports and a general investor wariness to a country that has become a frontline state in a new Cold War.

But again, Poland's broad domestic strength thanks to a quarter century of successful economic reforms have made the country more resilient to storms beyond its borders than it has been in centuries.

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