Poland’s economy has enjoyed turbocharged growth in recent decades, fuelled by a mix of export activity, strong internal demand, foreign direct investment and improving productivity levels. Since 2004, and the country’s accession to the EU, gross domestic product (GDP) has expanded by 90%, according to central bank figures. This performance, which has earned the moniker of ‘the Polish economic miracle’, has cemented the country’s position as one of the fastest growing markets anywhere in the world.
The onset of the Covid-19 pandemic only dented this growth to a marginal degree: GDP contracted by just 3.5% in 2020 against an EU average contraction of 5.9%. This marked the first and only time the Polish economy has contracted since 1990. It has since passed its pre-recession peak by expanding by 5.7% in 2021, according to the country’s statistical office.
“The Polish economy was quite immune to the pandemic,” says Hanna Cichy, senior business analyst with Warsaw-based Polityka Insight. “The economic sectors most affected by the health crisis, including tourism, hospitality and entertainment, account for a very small share of GDP and employment.”
The economic sectors most affected by the health crisis, including tourism, hospitality and entertainment, account for a very small share of GDP and employment
This encouraging performance has been accompanied by the sound management of the public purse. General government debt is low, at about 53% of GDP, while Poland’s fiscal balance is also favourable relative to regional norms at about –3% in 2022, according to the International Monetary Fund (IMF). Taken together, the Polish authorities have good reason to be pleased with the health of the economy.
Growth is also expected to remain robust over the next year. “Despite Covid, high inflation and rising interest rates, we expect the economy to do rather well, with growth most likely exceeding 4%,” says Przemek Gdański, CEO and president of the management board at BNP Paribas Bank Polska. “Robust demand from Poland’s trading partners underpins strong exports, which are additionally supported by a competitive Polish zloty exchange rate.”
Slowdown ahead
After decades of astonishing growth, several complex challenges are starting to cloud the country’s medium- to long-term outlook. For one, the spectre of inflation is stalking the economy to an alarming degree. Even before the arrival of the Covid-19 pandemic, consumer price inflation was tracking close to 3.4% at the close of 2019, according to the IMF. This was above the central bank’s ideal target of 2.5%, but within its flexible target range. Ensuing supply chain disruptions, combined with fiscal and monetary stimulus, have stoked this problem further. In December 2021, the annual inflation rate stood at 8.6%, according to the statistical office.
To combat this inflationary surge, the government announced a suite of measures under a so-called ‘anti-inflation shield’. This was initially launched in November 2021 with a four-month timeline, before being extended in February 2022 until at least halfway through the year. Measures include cuts to value-added tax (VAT) on petrol and diesel, as well as slashing VAT on food, gas and fertilisers to 0%. Most observers expect this initiative to put a temporary dent in Poland’s inflation trajectory, though it will, in effect, postpone the country’s inflation peak until 2023.
“I’m very worried that an excessively generous anti-inflation shield is de facto fiscal stimulus, which is constraining inflation which in the short term, but in the longer term will make core inflation more persistent,” says Rafal Benecki, chief economist for Poland at ING.
Indeed, criticisms of Poland’s current fiscal and monetary policy mix have been increasing. Though the central bank hiked the nation’s key policy rate four times in the closing months of 2021 and early 2022, raising it to 2.25%, more increases will be required to address the inflationary threat. Yet some argue that action has been taken too late, given that evidence of rising inflation was clearly mounting last year, while fiscal stimulus measures have also been slow to unwind.
“During the pandemic there was a good expansionary reaction in terms of fiscal and monetary policy, and Poland weathered the crisis well,” says Mr Benecki. “Unemployment is back to almost pre-crisis levels and GDP growth is rebounding. But inflation is also high. That’s the signal that the authorities should remove part of the expansion they had during the pandemic, but it’s not happening quickly enough.”
Meanwhile, Poland’s private sector is facing up to a diverse and quickly evolving set of difficulties. The country’s investment environment has dampened as a result of geopolitical tensions, ranging from a refugee crisis on the Belarussian border to the threat of war between Russia and Ukraine. These problems have been compounded by the Polish government’s political squabbles with the EU — a source of much-needed financial support — as well as changes to the domestic tax regime that have complicated things for businesses.
“The private sector in Poland is facing a mix of serious external and domestic challenges, including geopolitical pressures, rising interest rates and a poorly executed change to tax policy,” says Ms Cichy.
New tax regime
The launch of the so-called ‘Polish Deal’ in January 2022, which has been billed as the largest change in domestic tax law since 1990, is a case in point. This includes a new minimum tax for businesses; specific tax and social security obligations on employee and board-member remuneration; new and modified tax reliefs covering research and development and other value-added activities; and additional transfer pricing restrictions covering a range of business transactions.
The challenge facing Poland’s private sector is the scope of these changes, as well as the speed with which they have been introduced. To date, its execution has also been handled poorly as government errors have quickly piled up. “Whether the changes are good or bad, time will tell,” says Ms Cichy. “What has been bad is how fast it was implemented and how many mistakes have been made [since it was rolled out].”
Meanwhile, the problems posed by a less-favourable investment environment will do little to alleviate low levels of private investment in the country. From a high of 24.2% of GDP in 1999, gross fixed capital formation, a measure of domestic producers’ investments, fell to just 16.6% of GDP in 2020, according to data from the World Bank. Re-energising expenditure of this kind will be vital to Poland’s economic health over the medium to long term.
Recovery support
One means of achieving this goal lies with the NextGenerationEU funds, a Covid-19 linked recovery package intended to support the modernisation of Europe’s economy. Through this programme, Poland has applied for about €36bn in loans and grants, but their allocation has been delayed by an ongoing dispute between the country’s governing Law and Justice Party and the European Commission (EC) over judicial reform issues. This includes an EC request to dismantle a newly created disciplinary chamber for judges in Poland, as well as a Polish constitutional court ruling in October 2021 that found parts of EU law conflicted with the national constitution.
All of this means that the coming year will mark an important inflection point for Poland’s long-term economic future. The government must work hard to address its differences with the EU, while engineering the kind of policy environment that is required to foster robust and sustainable long-term growth. Meanwhile, tightening monetary policy conditions will help to tilt the country in the right direction to address the challenge of inflation, even if that presents new challenges for consumers.
“Overall, we think that this year’s economic policy [decisions] could be crucial for the long-term trajectory of the Polish economy,” says Mr Gdański. “Tighter monetary conditions through higher interest rates will doubtless have some negative impact on the pace of GDP growth. This sacrifice appears necessary, though, to eliminate imbalances in the economy — both inflation and a rising current account deficit — and ensure a sustainable growth pattern for the future.”
