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Star economy poised for years of growth

11 Dec 2019 16:22|Bartosz Grejner

Three decades after a tumultuous transformation to a market economy, Poland has managed to become an oasis of stability. Stable currency, firm interest rates, and robust growth place the Polish economy on a clear path to outperform both the euro area and the EU in the coming years of a global slowdown.

If you wondered how Poland has fared in the last few years, the answer is dangerously close to ‘never better’ territory. The gross domestic product grew at an average rate of 4% in the previous five years and shifted into fifth gear in 2018 with a 5.1% gain. At the same time, the condition of the labor market improved significantly. Unemployment dropped from 10% to 3%, one of the lowest in the EU, and yearly average wage growth at around 7% became the new normal. Small wonder that Poles are on a shopping spree: retail sales have been averaging each month a 5.4% year-on-year growth in the last five years, with rates north of 10% not being anything unusual in the previous three years alone.

That happens on the back on the cheering that Germany didn’t enter a technical recession in the third quarter and expanded a symbolic 0.1% on a quarterly basis vs. 1.3% in Poland. The last five years weren’t all that bad for the biggest economy in Europe, but it barely managed to expand at half the speed Poland did and averaged 2% in 2014-2018. That being said, Germany is still the largest economy in Europe and Poland is the most dependent on it, with both export to and import north of 20%. The global slowdown could, therefore, eventually creep into the Polish economy, as it did into other CEE countries, lowering the forecast growth. However, this seems less likely now with Germany showing some semblance of bottoming-out and the beaten-down manufacturing sector in Europe picking up by a notch in recent months. Apart from cyclical factors, heavily export-dependent European economies were hit by trade tensions between the U.S. and China, but those seem to be easing. Positive developments coming from both sides, suggesting eeking towards a ‘phase one’ trade deal, could be the factor allowing achieving or even surpassing the forecast growth both in the EU and in Poland.

The outlook picture for the Polish economy is quite good as well. The European Commission, in its Autumn Economic Forecast, expects it to expand at a rate of 4.1% this year with 3.3% in the next two years. That compares with a flat projection of 1.1% growth for the euro area and 1.4% for the 28 countries of the EU. The National Bank of Poland was even more optimistic in its November projections forecasting an increase in the GDP of 4.3% in 2019 and 3.6% and 3.3% in, 2020 and 2021, respectively. That was even after toning down by 0.2-0.4 percentage points due to global slowdown concerns and trade tensions. There is, however, one key thing ‘missing’ from the Polish economy.

Negative interest rates. One of the main talking points of most economists nowadays, a notion that defies the logic of macroeconomic textbooks. While the euro area grapples with rates below zero and negative-yielding debt, and the potential ineffectiveness of this solution (as pointed out by several Federal Reserve members, among others), The National Bank of Poland (NBP) has managed to hold the main reference rate at 1.5% since early 2015. Up until today, there just hasn’t been the case to change it: the gross domestic product growth has been relatively high and inflation remaining in, or slightly below, the target range of the central bank. And it will continue to be the case in the next two years, according to both the European Commission and NBP forecasts. That creates more legroom to decrease interest rates if the global slowdown deepened, or trade tensions unexpectedly worsened, a similar scenario that the Federal Reserve faces now in the U.S. It may have been a bit boring for the Polish central bank, but the sole fact that it could choose to do nothing, while its counterparts in the euro area had to go deep into negative territory, makes Poland one of the start economies. Especially if one factors in the growth in GDP and wages, and the strength of the Polish consumer.

Such circumstances, with little-changed monetary policy, create an environment for a stable currency. The Polish zloty has been less volatile compared to most of its peers since the financial crisis a decade ago, which is one of the hallmarks of a country knocking on the door of the ‘advanced economies’ group. That being said, there is one area of underperformance in Poland, and it’s the equity market. While the main indices in the U.S. post record high after record high and even their European counterparts came very close to all-time highs, the Polish index comprising of 20 biggest listed companies would need to increase nearly twice to reach its peak. This area is the one that investors in Poland could take a cue from their U.S. counterparts and learn that growth in the equity market is linked with growth in the economy. Should they learn that it may just occur that the Polish market is quite a bargain and move closer in 2020 to surpass record highs from a dozen years ago.

With the condition Poland found itself in, the merit of two decades of economic decisions, the star of Poland should shine ever brighter in any scenario – trade tensions or not.

11 Dec 2019 16:22|Bartosz Grejner

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