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Are the quarters of recent rapid GDP growth ahead of us?

On August 16, the Polish Central Statistical Office (GUS) will announce preliminary GDP data for the second quarter. It is very likely that we will get the message that the Polish economy has grown at a rate of at least 3.5%. YOY. Unfortunately, there is a growing risk that in the coming years Poland's development will noticeably slow down- writes Marcin Lipka, senior analyst at Conotoxia.com

Marcin Lipka, główny analityk Cinkciarz.pl

The International Monetary Fund (IMF) in the second half of July has published an annual report on the Polish economy. Apart from paying attention to rapid GDP growth, driven by consumption and stockpiling in the first quarter of this year, the IMF has listed quite a number of risks for our country.

In many parts of the report, the Fund has stressed the need to launch fiscal consolidation "as soon as possible", i.a. to reduce the deficit of the public finance sector, which has been close to the EU limit despite the cyclical recovery. The current favourable economic conditions should be used to build fiscal space in the case of future economic shocks, higher costs of ageing society or expected infrastructure investments- the IMF stresses.

The Fund's report has also focused on the hypothetical effects of the Family 500+ child benefit program, changes in retirement age, the slowdown in investment and uncertainty among entrepreneurs. It is worth noting, however, that the IMF, in comparison with the two-year forecasts, has very clearly revised its estimates of potential GDP growth for Poland.

Abroad with higher growth, Poland with lower one

According to the Fund's July forecasts, the GDP growth in 2017 will be 3.6%. The Ministry of Finance (MF) has presented analogical expectations, however, signals from the ministry may indicate that this value may be exceeded. The consensus of economists surveyed by Bloomberg shows the median of expectations at 3.8 percent.

Much more significant differences have started to appear in subsequent years. The IMF estimates that in 2020 Poland's growth will slow to 2.8%, while the "Multi-Year Financial Plan of the State" prepared by the IMF assumes acceleration to 3.9%. What is interesting, two years ago, Washington's estimates for 2020 were 3.6 percent. This means that the rate of potential GDP growth for Poland has been reduced by 0.8 percentage points since 2015, so almost a quarter. At the same time, expectations for Germany or the Czech Republic have been increased by 0.1 percentage point. What makes such a big difference?

Lower retirement age and fiscal risks

It has been known for a long time, that Poland will struggle in the coming years with demographic problems. The population of working-age people has been decreasing at a pace of about 1 percent, although the range of these changes will vary over the next decades, it is likely that the number of people who will be able to work will decrease by about a quarter by 2050.

In the coming months, demographic risks will be deepened by the change in retirement age. According to the IMF, for this reason, the potential output will be reduced from 0.6 to 0.9 percent over the medium term to 0.8-1.2 percent over long run. In addition, this will negatively affect the results of the public finance sector, increasing the average deficit by 0.5 percentage point annually and debt to GDP by over 4 percentage points by 2025.

Compared to the scenario of leaving the retirement age unchanged, the number of people in working age should decline in the next 7 years by about 1.5 million. However, by 2022, the ratio of average retirement benefit to average domestic pay for a woman is likely to decrease from 43 percent to 35%, so about one fifth.

The IMF has been also trying to assess the impact of the Family 500+ child benefit program on the labour market. On the one hand, it has been created to increase the number of births by 290 k in the next decade, but it can also cause the outflow of women from the labour market at the level of 240k, and generate annual costs of more than 1 percentage point of GDP. The total negative impact on the fiscal result of recent changes has been estimated at 10 pp of GDP in the next decade, which according to the Fund "reduces national savings and reduces resources for investments."

The lower economic growth and higher spending have also increased the risk of serious fiscal problems. According to the IMF model, there have been 25% of the probability that by 2020 the ratio of debt to GDP will exceed 60%.

The IMF can be wrong, but...

In the case of every analysis, and especially as comprehensive as the future results of the economy of the whole country, there has been a high risk of error. Unfortunately, even if we assume, that the IMF estimates are rather pessimistic, it is difficult to argue that the reduction in retirement age generates enormous costs, while the new social programs reduce the fiscal space.

With the economic growth above potential and good external conditions, these elements do not translate directly into debt servicing costs or investment opportunities of the country. However, if the European economy returns to a slower pace and sentiment on the capital markets deteriorate, the fiscal risks will increase significantly. Then the probability of exceeding the constitutional level of debt (60% of GDP) will increase significantly, which may inevitably lead to a reduction in both private and public investment. In such a scenario, the potential GDP will fall quite rapidly, especially with limited fiscal space for the economy's stimulation.

 

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