2020 Vision: a Brexit silver lining to gathering economic clouds in Poland?
The Polish economy is expected to hold a steady course in 2020, but economists are keeping a keen eye on creeping inflation, a tightening labour market and Brussels. But could Brexit deliver a silver lining?
Poland has undergone a miraculous period of growth in the 30 years since the end of communism. The most recent IMF “World Economic Outlook” predicts that, with GDP growth of 3.1%, the Polish economy will grow solidly in 2020, especially compared to its European counterparts that are predicted to average 1.8% GDP growth, amid a wider global and regional slowdown. However, there are a number of developing trends and economic headwinds to keep an eye on as we venture into 2020 and beyond, from a tightening labour market and the risk of inflation to a potential Brexit silver lining, that could add a new turn to this remarkable economic story.
Gordian knot for the Central Bank
Poland has had a prolonged period of interest rates held at 1.5% since 2015. The case for any policy change has been limited. The country has experienced record GDP growth in this period, averaging 4.1% while inflation has remained low, in the range of -0.65 to 2%. However, 2020 will pose a challenge as data from the Central Bank of Poland (Narodowy Bank Polski: NBP) shows inflation gaining pace to 2.8% compared to 2.3% in 2019, which falls outside the central bank’s target range of 1.5% (+/-1%) and represents a seven-year high. More recently, the inflation rate increased from 2.6% in November to 3.4% in December – the largest monthly jump since October 2012.
Meanwhile, the November 2019 GDP forecasts by NBP foresee growth slowing to 3.6% in 2020, compared to 4.3% in 2019. This creates a bind for the bank as any attempt to support sustained high growth rates (essential to closing the gap with the original EU15 members) by cutting rates further would cause an inflation spurt eroding spending power. However, attempts to rein in accelerating inflation by increasing rates would further dampen GDP growth. The central bank governor Adam Glapiński has stated that he expects that rates will be held at their current level through to 2022, but any further negative change in GDP growth or inflation may force his hand.
Xavier Begg is a financial analyst based in Warsaw. Originally from New Zealand, he has worked as a financial policy analyst for the New Zealand Ministry of Education and since 2015 has worked as an analyst for various international banks based in Warsaw. He has studied in New Zealand and Poland (Warsaw School of Economics), ultimately obtaining a double degree in Economics and Political Science from the University of Otago.
Tightening of the labour market
The story of the Polish labour market for the past 5 years has been one largely about Ukraine. Since 2014, over one million Ukrainians have come to Poland to work. According to NBP, this influx has contributed to 11% of the nation’s GDP growth since 2014, largely by helping to plug a labour market gap created by an ageing society and the mass emigration of Poles since EU accession. This has allowed companies across the economy, from agriculture and manufacturing to service centres, to continue to grow while moderating already high wage inflation.
However, the newspaper Rzeczpospolita recently published the results of a survey by the employment agency OTTO Work Force suggesting that 52% of Ukrainians working temporarily in Poland are looking to move to another country, with Germany, the Czech Republic and the Netherlands being prime destinations. Germany’s recent immigration changes, opening the labour market from 2020, may support this outflow. The continued stabilisation and economic recovery in Ukraine itself may also serve to draw some Ukrainians back home, while stopping more from emigrating.
If this change is realised, Poland will need to make a series of hard decisions. Eurostat has already reported 49% of Polish industrial companies will limit production due to labour constraints and companies across the economy will face a difficult choice between further production delays, large capital investment in automation, further wage increases to retain workers or delve into the complex immigration process to recruit workers from outside the EU.
Loss of fiscal stimulus
Fiscal stimulus either through the state or the EU has enabled Poland to make significant infrastructure and social investments which have sustained the polish economy. Both sources of this stimulus, however, are either drying up or being significantly reduced. The significant social investments, such as the universal child pension “500+” introduced by the current government (2015-2019 ), were funded by cracking down on VAT evasion.
In 2019, the Centre for Social and Economic Research (CASE) estimated that the country’s VAT gap fell from 24% in 2015 to 7.2% in 2018. This change brings Poland in line with countries such as Denmark and Finland, which would suggest there is limited space for further reductions in the gap and that this source of funding has largely been spent. The loss of further fiscal stimulus could act as a dampener on internal demand which has been a bedrock for economic growth.
The country also faces the spectre of reduced EU funding going forward. Since 2004, Poland has received over €100 billion in funding, which has allowed for large investments in infrastructure, as well as supporting agriculture and the formation of new businesses. The current EU budget cycle is coming to a close in 2020 and early proposals for the 2021-2027 cycle, if realised, would see Poland’s funding reduced by up to €14.5bn over the five year period.
This is a result of a number of factors, including the EU’s desire to reduce funding for common agricultural policy (CAP) and cohesion policy, Britain’s EU exit reducing the total funding pool and Poland’s success in closing the wealth gap with the original EU15 countries. There is also a lingering threat that the cohesion funds may be made conditional on the “rule of law” or migrant burden sharing, two areas of contention on which the Polish government has refused to budge. While EU funding is not critical to the country’s growth story, it has been supportive and any funding loss could moderate future growth.
Green New Deal
One of the signature pieces of policy for the new EU Commission under Ursula Von Der Leyden has been the Green New Deal. In December, the outline of the deal was agreed and every EU member except Poland signed up to an objective of carbon neutrality by 2050. Poland’s primary concerns were the cost of the transition to renewable energy when the country is reliant on coal for nearly 80% of its electricity generation. The government sought significantly larger financial support in order to sign up to the Green New Deal than was contained in the EU’s proposed €100bn “Just Transition Mechanism” designed to support nations in transitioning to climate neutrality.
The risk faced by Poland in maintaining this stance is that it may miss out on its fair share of funding from the EU to support the transition. President Macron has already stated that the solidarity mechanism would not apply if Poland did not sign up to the 2050 objective. Given that a structural transition is inevitable in the face of climate change, this stance may lead to the situation where the entire cost of the transition falls on the Polish taxpayer, which would only draw further domestic pressure from the electorate – an IPSOS poll in September 2019 found that more than a third of Poles (38%) view the climate crisis as the biggest threat to the nation.
By declining to join the Green New Deal, Poland could also preclude itself from EU support to develop domestic climate-friendly industries, which could see neighbouring countries outpace Poland in developing these new technologies going forward.
The election victory of the Conservative Party in December indicates that the final Brexit result will be a negotiated ‘Hard Brexit’. While suffering the same direct exposure as countries such as Ireland or Belgium, the wider effect on the entire EU will likely act as a growth dampener for Poland in the near term.
However, there is a silver lining to this cloud. The UK has seen the number of Poles in the country fall for the first time with a drop of 85,000 registered in 2018, according to Statistics Poland (Główny Urząd Statystyczny: GUS) research which utilised Office of National Statistics (ONS) data. This process will likely accelerate as the British economy continues to stagnate under the fallout from Brexit while Poland continues to grow, even if at a slower rate, reducing the income gap between the two countries and making a return to Poland a more attractive choice.
The return of Polish expats could bring back a workforce that has gained a high level of skill and education in the UK, which could help to plug increasing labour gaps and form new startups in the country. Brexit may also provide an FDI kick for Poland, as companies relocate to the EU following Brexit. EU rules will require companies to maintain a base in the EU and as a UK base will no longer suffice, Poland stands to gain due to its highly educated yet still relatively cheap workforce.