>A stroll around Warsaw is enough to convince even the most pessimistic economic Cassandra’s that the Polish economy is not in free fall - far from it. Judging by the quantity of luxury cars on the streets, continuing construction projects and the number of people in the city’s malls, the country is weathering storm pretty well.
The economic statistics bear out this general picture. In contrast with all the other European economies, Poland has posted modest growth over the past two quarters. Unemployment has risen a bit and is currently hovering just over 10% but this is a long way from the calamities elsewhere. Manufacturing output fell steeply in the first months of 2009 but is now roughly at the same level as this time last year. Retail sales also are also showing positive signs.
Prime Minister Donald Tusk and his British-born finance minister, Jacek Rostowski, were of course the first to claim credit. The Prime Minister proudly gave a press conference against a back drop of a map of Europe which showed the extent of economic collapse across the continent. In green, Poland stood out with the only country with a modest growth in the second quarter of 1.1%.
Of course any politician worth his salt would jump at the chance of exploiting this good fortune. In reality, however, the relative good showing of the Polish economy has little to do with the government’s handling of the economy. The so-called anti-crisis package includes modest proposals to loosen the labour market but unfortunately no dramatic reforms. More saliently, the Polish economy has faired better, particularly than its smaller central European neighbours, because its relative size makes it less dependent on exports and therefore the depressed economies of Western Europe. During the boom years, the Polish financial sector was also maybe a little more conservative than others and has therefore avoided some of the fall out as the economy slowed.
Most importantly, however, Poland has benefited from not joining the euro. This is an ironic piece of good fortune as the government had made joining the euro as soon as possible a major political goal.
As the economic crisis gathered momentum, investors chose to flee en masse from all currencies tainted with the emerging market label. From a high of 3.19 zlotys to the euro in July 2008, the currency plunged 50% to reach 4.82 in February of this year. As a result of government intervention the currency has since strengthened but remains 30% below its peak. The effect of this has been to simultaneously boost exports and hold back imports. As a result the trade deficit on the first seven months of the year is less than half what it was in the same period last year.
The contrast with Slovakia could not be starker. Slovakia abandoned its korona and joined the euro zone at the beginning of the year. In typical style, the much of the Polish political establishment and the commentariat went into self-flagellation mode. Unlike its go-ahead southern neighbour, Poland’s failure to get into the euro zone was supposed to be another sign of Poland’s lack of collective will. In retrospect of course, 2009 was the worst of years to join the euro. Whist Poland has weathered the downturn relatively well, the Slovakian economy shrank 5.4% in the second quarter.
Despite its relatively healthy position, the Polish economy has by no means out of the woods. Unemployment has risen by 1% over the past year and wage rises are starting to be nibbled by inflation. Nominal wages were up 3% in August year on year but inflation was up 3.7%. The level of individual debt delinquency has also risen dramatically. According to the National Bank of Poland, the amount of debt which is not being regularly serviced has risen by 50% of the past year to PLN 18 billion (approx. GB£ 3.9 billion).
Another worrying sign is the fall in the index tracking industrial orders, which reached its lowest level this August. The number of bankruptcies is also rising, including high profile companies such as Łódź-based apparel distributor Monnari. Despite planned budget cuts, state finances are also beginning to feel the heat. Due to falling government revenues and rising expenditures, the budget deficit is expected to widen dramatically next year to PLN 52 billion (approx. GB£ 11.2 billion) from a planned PLN 27 billion (approx. GB£ 5.8 billion) this year.
More importantly, the structural problems which have long plagued the Polish economy remain as threatening as ever. Above all, there is the problem labour participation which at 52.8% is the lowest in the EU. Given an aging population and Poland’s extremely poor record of finding employment for its older citizens, this is a time bomb which will get worse unless the government finally finds the courage to do act.
Still, by comparison with the rest of Europe, and indeed most of the world, Poland appears to have faired remarkably well. The government expects growth this year of 0.9%. The budget bill for 2010 envisages a growth of 1.1%. The National Bank of Poland is even more bullish with a forecast of 2%.
Toby Beck
BSI Sp. z o.o.
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