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Is the Polish economy close to hitting rock bottom?

21 Nov 2018 16:36|Marcin Lipka

"This year Poland will be the second fastest growing economy after Ireland among the 34 countries surveyed by the OECD. Sadly, Poland's position will begin to deteriorate drastically and between 2030 and 2060 economic growth will be the slowest among all OECD countries," writes Marcin Lipka, Conotoxia Senior Analyst.

Polish GDP is expected to grow by about 5.2% this year. The forecasts of the Organisation for Economic Cooperation and Development (OECD) seem realistic, taking into account the economic condition in the past three quarters. Other data also looks encouraging. Unemployment is expected to fall to 3.2% by the end of next year. In 2019, inflation is expected to only marginally exceed the National Bank of Poland's target of 2.7%.

The Polish economy is relatively balanced externally. The current account deficit will oscillate around 1% by 2020, and according to the EU methodology, the debt to GDP will decrease to 46.2%, i.e. by as much as 3 percentage points. Then, why is Poland pushed below the level of the countries with the most significant economic problems, including Italy or Greece, if it is second in the case of growth (after Ireland)?

Forecasts from a horror movie

The OECD prepares not only short-term projections but also multi-annual growth estimates, including the latest one from July 2018. According to "The Long View: Scenarios for the World Economy to 2060", Poland's potential annual growth in GDP per capita between 2030 and 2060 is expected to be only 1.3%. This is the weakest result not only in the EU but also in the OECD as a whole. It is also the second worst result among the 46 countries surveyed, apart from Russia with 1.2%.

The meagre growth for three decades means that Poland has no chance of catching up with any developed economies. Poland's level of wealth, measured by GDP in purchasing power in relation to the USA, will practically remain at a similar level as today (an increase from 50% to 54% in 2060).

In the GDP per capita classification in relation to the United States, Poland will be overtaken by all the countries of the region: Hungary - 60%, Slovenia - 62%, Slovakia - 79% and the Czech Republic - 77%. On the other hand, China - 51 % and India - 44 % will breathe down Poland's neck.

Labour market as the greatest threat

OECD studies indicate that Poland's biggest problem will be the labour market. The level of employment is expected to decrease by 0.2% each year in the years 2030-2060 (the most in all countries). First of all, it is the effect of demography, i.e. an ageing population. Demographic problems, however, also concern other countries.

The intensification of this factor in Poland may be a result of changes introduced in recent years. The IMF estimates from 2017 show that the working age population, due to the introduction of a lower retirement age, will decrease by as much as 10 percentage points by 2050 compared to the gradual increase in the retirement age scenario. Another negative impact on labour supply from 2030 will be the rise in the starting age of compulsory education.

At the same time, the OECD points out that fertility is more favourable when cash is replaced with material benefits for families (e.g. free kindergarten, nursery), while at the same time allowing women to return to work more easily and reducing the risk of their skills being downgraded. Does this mean that the OECD and the IMF suggest that Poles should work almost from birth until death? Of course not.

When it comes to demographic problems, it is important to make a compromise, which illustrates well, for example, the solution introduced in Portugal. The retirement age in Portugal is being raised by two-thirds of the increase in life expectancy. As a result, a longer life not only means a longer work life but also a longer period of retirement.

In the presentation made on March 18th, 2018, the OECD pointed out that the health spendings in Poland are the second smallest among the countries surveyed, which also reduces the willingness of older people to remain in the labour market and lowers their overall quality of life. Moreover, in Poland, part-time employment and work during education are not promoted either.

A long line of structural problems

The potential economic growth not only lies in the number of employees but also in their productivity. It depends to a large extent on the quality of education (including informal education), the tax system of spending on research and development, the institutional framework or the level of market liberalisation (e.g. public services).

Increasing spending on research and development to the leading countries (Korea, Israel) would allow an increase in the Polish GDP by more than 10% in the forecast (by 2060). The implementation of labour market reforms would also allow the GDP to increase by another 10%, and pensions by 8%. Higher potential growth also means better use of public investment, the fight against corruption and greater responsibility of those who make the decisions.

A forecast with a warning

Are the forecasts suggesting a decrease in potential GDP growth per capita in Poland to 1.3% going to come true?

As the OECD analysis suggests, long-term trends are easier to predict than changes from year to year. Today, a good external situation, an unexpected inflow of immigrants from the East or the tightening of the tax system provides short-term relief and remove the need for painful and time-consuming reforms in Poland, such as pensions or labour market reforms.

In the long term, it would be difficult to "fix" the weaknesses of the Polish economy with ad hoc measures, and the costs of delayed changes will increase significantly. Perhaps the OECD model scenario is too pessimistic, but many countries in the world have wasted their opportunities and have turned the leader's position into an outsider's ones with fragile prosperity.

21 Nov 2018 16:36|Marcin Lipka

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