"Fast GDP growth, record low unemployment, solid wage increase, favourable migration balance and moderate credit growth characterised 2018 in Poland. Although after 1989 there have been years with impressive GDP growth, it has never been as balanced as last year," writes Marcin Lipka, Conotoxia Senior Analyst.
At the end of 2017, there was no analytical centre which would indicate that the GDP in 2018 would grow by approx. 5%. In November 2017, the NBP estimated that the national economy would grow at a rate of 3.6% in 2018. The European Commission was slightly more optimistic but still estimated that index at only 3.8%.
The clear acceleration of the development compared to forecasts appeared to be the biggest surprise. Why should the year be considered to be the best in at least three decades, when during this period there were years with GDP growth of up to 7%?
Rapid but unsafe growth
After 1989, Poland has gone through two phases of rapid economic growth. The first one took place between 1994-1998. Unfortunately, the fast pace of development was then burdened with high inflation, which clearly exceeded the 10% level. Double-digit unemployment was also maintained. Additionally, Poland started from a relatively low level of GDP per capita. According to the IMF data, in the purchasing power parity, GDP amounted to only 10 thousand USD (currently about 30 thousand USD). The economy grows much easier when it starts at a low level.
The second above-average growth period took place between 2004 and 2007, especially the end of this period (2006 and 2007). Unfortunately, at that time the economy was again unsustainable. The current account deficit exceeded 6% of GDP in 2007. The state was very strongly stimulated by credit.
The NBP data from a decade ago showed that the increase in the value of mortgage loans in the analysed period reached 60% year-on-year, and consumer loans exceeded 40% year-on-year. As we remember, the bubble on the real estate market, which was caused by this mad increase in debt, quickly burst, as a result of which flat prices practically froze for the next decade.
The 5% GDP growth recorded in 2018, was faster and more sustainable than ever before. Inflation was clearly below the NBP target. The deficit of the public finance sector was likely to be at a record low and should not have exceeded 0.5% of GDP. Compared to previous years, the current account balance has slightly deteriorated, but its negative value was unlikely to exceed 0.5% of GDP, which could generally be considered as a state of lack of external imbalances.
There has never been such low unemployment, which, according to the Polish Central Statistical Office (GUS), in the quarterly BAEL survey amounted to 3.8% for Q3 2018 (seasonally adjusted). The low unemployment favoured the growth of wages at around 7% year-on-year. It was enough for the majority of citizens to feel the increase in the purchasing power of their earnings, and at the same time, it was not enough to threaten the financial stability of enterprises. There were also no special risks, e.g. on the real estate market. Comparing to 2006-2007, the loan was growing at a moderate pace (3.3% year-on-year mortgage and 7.9% year-on-year consumption in Q3 2018).
It is also worth noting another aspect important for GDP growth. Finally, 2018 probably had a positive migration balance, which at least slightly reduced the negative effects of the ageing population. Due to the inflow of Ukrainians and Belarusians to Poland, the Social Insurance Fund also recorded a smaller deficit.
Let’s not be blinded by the positive aspects…
Unfortunately, not all the information received last year was positive. Private investment was still modest, and it is this that guarantees sustainable GDP growth. There were no structural reforms in the labour market - the promotion of youth employment or those approaching retirement age. There were also no favourable solutions for women, which will make it easier to achieve a work-life balance (e.g. preferential part-time employment).
As a result, despite very low unemployment, the percentage of employees in Poland remained clearly below the level seen in Europe. Increasing it from 68 to 75% would increase employment by 1.8 million people. Such an increase in the number of new payrolls would be extremely beneficial for the long-term effectiveness of the Polish economy or the stability of public finances, even in periods of economic downturn.
It seems the golden period for immigration had not been adequately used to regulate it. Workers from Ukraine or Belarus are extremely valuable at the moment and facilitating their employment and detention in the country should be a priority, especially since other countries are already competing for them.
On the other hand, the fact that Poland finally managed to introduce an optimal savings programme for retirement in the form of Employee Capital Plans (PPK) should be viewed as positive. Therefore, there is a chance that for the first time Poland will develop with domestic capital, and perhaps in years to come this capital will be exported in the form of foreign investments of Poles.
Can history repeat itself?
Reaching 5% GDP growth will be extremely difficult to repeat. It results both from demographic limitations and insufficient investment in research and development. The economic activity of Poles has been low too and the period of prosperity has not been properly used to improve it. Reducing the retirement age combined with inappropriately addressed and too costly social programmes might have had a negative impact on GDP growth and debt in the years to come.
The external situation has also become more and more demanding. The eurozone is clearly holding back, and no effective disciplining mechanisms for the economies of individual countries promotes economic imbalances within the Community and increases systemic risks.