Emerging

Loss of momentum

th  
11  
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
Poland  
Loss of momentum  
In the first half of 2019, Poland’s economic growth held up well to the deterioration of international conditions. Its economic  
prospects remain relatively positive in the short term despite the downturn in the cycle. The economic model of competitiveness  
and low labour costs  the foundation of the economic transition of which Poland is a successful example  will be altered by the  
more generous social policies introduced by the current government. Cyclical and structural factors argue for a slowdown in  
investment growth over the short and medium term. Of the factors weighing on medium and long-term growth potential, the  
demographic decline seems the most potent.  
A controlled slowdown  
1
- Forecasts  
We have upgraded our growth forecast for 2019 from 4% to 4.3%  
and downgraded our 2020 forecast from 3.5% to 3.3%. Despite  
pressure on international trade, slowing growth in the euro zone and  
the contraction of Germany’s GDP in Q2 2019, Polish economic  
activity again surprised positively over the first part of the year. First  
half GDP growth was a vigorous 4.4% year-on-year (y/y). Although  
this was slower than the 5% seen in 2017 and 2018, it was  
nevertheless stronger than the five-year average of 4%. The  
quarterly variation shows a steeper slowing (from 1.4% q/q adjusted  
for seasonal variations and working days in Q1, to 0.8% in Q2), and  
this will continue. International conditions suggest that exports,  
production and private investment will all lose speed over the next  
few quarters and ultimately feeding through into consumption, the  
main engine of growth.  
2
017 2018 2019e 2020e  
Real GDP growth (%)  
4.6  
5.2  
4.3  
3.3  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
2.0  
1.7  
2.3  
3.2  
-1.5  
-0.4  
-1.5  
-1.4  
50.6 48.9 47.4 46.0  
0.2 -0.6 -0.5 -2.0  
Current account balance / GDP (%)  
External debt / GDP (%)  
72.2 61.3 58.5 57.0  
94.5 102.3 103.8 105.2  
Forex reserves (EUR bn)  
Forex reserves, in months of imports  
Exchange rate EURPLN (year end)  
4.8  
4.2  
4.8  
4.3  
4.5  
4.3  
4.3  
4.3  
e: BNP Paribas Group Economic Research estimates and forecasts  
2
- Growth, inflation and unemployment  
Real GDP (%, y/y)  Annual inflation (HICP, %)  
Having disappointed in Q1, household consumption (61% of GDP)  
bounced back in Q2 (1.2% q/q adjusted and 4% y/y). Labour market  
tensions, symbolised by the historically low unemployment rate  
Unemployment (%, s.a.)  
(
3.3% in August according to harmonised Eurostat statistics), have  
maintained strong upward pressure on nominal wages (7% y/y in  
H1). Retail sales remained on a positive trend in August, as did  
consumer confidence in September. Domestic demand was also  
boosted by an expansionist policy mix, made possible by a degree  
of room for manoeuvre on the budget. Having won legislative  
elections, the conservative PiS Party, which has been in power  
since 2015, has promised increases in the minimum wage of 78%  
by 2023.  
10  
9
8
7
6
5
4
3
2
1
0
-
1
2
Total investment rose by 10.6% y/y in H1, under the continued  
influences of business investment and public infrastructure  
investment. The capacity utilisation rate has held at an historically  
high level of above 80% for more than a year. Exports of goods and  
services remained strong in year-on-year terms (up 4.9% in H1 by  
volume and 8.5% by value over the first seven months of the year),  
contributing to the robust performance of external accounts despite  
strong growth in imports.  
-
2014  
2015  
2016  
2017  
2018  
2019  
Source: GUS, Eurostat  
& export order books, production and employment. The  
Manufacturing PMI supports this view of deteriorating prospects in  
the short term.  
However, exports slowed on a quarterly basis over the first half  
The risk of an economic slowdown in the second half led the  
National Bank of Poland to hold interest rates steady at the  
beginning of October (at 1.5%, unchanged since 2015). The NBP  
reiterated the transitory nature of inflation above the 2.5% target,  
which has been due mainly to an increase in food prices. Core  
inflation hit 2.4% in September whilst headline CPI inflation dropped  
from 2.9% y/y in August to 2.6% in September.  
(
down 0.4% q/q wdsa in Q1, and up 1% in Q2), whilst industrial  
production, notably in manufacturing, stood still in August (down  
.3% y/y in August, giving a three-month moving average of 0.6%  
1
y/y). This slowdown can be seen in the latest confidence surveys of  
companies in the manufacturing sector (September), which were  
more pessimistic about the overall economic position, the domestic  
th  
12  
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
A review of a successful economic transition  
3
- Contributions to GDP growth and potential GDP growth  
Since the beginning of the 1990s, Poland has conducted a policy of  
economic liberalisation, which, combined with institutional reforms  
and political stability, has generated uninterrupted economic growth  
since 1992, at an average annual rate of 4.2%. According to the  
World Bank’s classification, Poland is an example of a successful  
transition from a low- to medium-income planned economy  
Total factor productivity (TFP)  Capital  Labour  
GDP growth  
5
0
.1  
.2  
4
3
2
1
0
1
0
1
.1  
.4  
0.2  
.5  
2
(
USD6,600 per capita in purchasing power parity terms in 1992) to a  
0
.5  
1.8  
.6  
2
1.5  
1.4  
market economy highly integrated within the European Union (EU)  
and global value chains and, since 2009, classified as high-income  
3.9  
0.2  
1.4  
1.5  
2.4  
2.5  
1
.8  
2.0  
0.0  
(
USD32,000 per capita since 2018).  
1.4  
0
0
.0  
-0.3  
-0.5  
Under the classical approach of breaking down growth into factors  
of production (capital and labour) and changes in total factor  
productivity (TFP), our estimates indicate that the accumulation of  
capital contributed 61% of GDP growth between 1996 and 2018.  
Efficiency gains, measured by the contribution to growth of TFP,  
contributed 34% to growth, the remainder coming from an increase  
in the labour factor. To borrow Paul Krugman’s phrase, the  
-
Source: AMECO, World Bank, BNP Paribas calculations  
Impediments to potential growth  
“perspiration” behind growth, that is the contribution of factors of  
Some structural factors will hold back potential growth over the  
medium to long term (see Eco Emerging, “Poland: Trees don’t grow  
to the sky”, April 2019). With a central scenario (M) estimating  
potential growth of 2.9% through to 2025, we have a low-range  
estimate (L) of 2.4% and a high-range figure (H) of 3.4%.  
production, came almost exclusively from the accumulation of  
physical capital. Meanwhile, the “inspiration” came both from  
technical progress, and improvements in the institutional framework,  
business environment and human capital.  
According to Marc Schiffbauer and Gonzalo Varela (“Macro and  
micro features of successful economic convergence: the case of  
Poland”, World Bank, January 2019), “the progressive integration  
into the EU bloc boosted growth and productivity because of three  
key factors: (i) increased openness to trade, investment and talent,  
The main differentiating factor between these three scenarios is the  
demographic constraint. Demographic projections established by  
the Polish Office of Statistics, Eurostat, the United Nations and the  
US Census Bureau agree on an acceleration of the decline in the  
Polish population that began in 2014 over the next few decades (-  
(
ii) increased domestic competition and regulatory harmonisation  
0.3% per year between now and 2030). Despite family policy  
with the EU and (iii) increased certainty in reforms, through a  
commitment to EU institutions.” Alongside private domestic and  
foreign investment, public investment benefited from European co-  
financing, particularly in infrastructure projects, as Poland has been  
the leading recipient of European structural funds.  
measures (family benefits, childcare, etc.) and scope for increases  
in the activity rate (notably amongst women), only massive  
immigration can offset the demographic decline and avoid a  
negative contribution from the labour factor to economic growth by  
2
025.  
At the same time, demographic decline has limited growth in the  
active population and employment: the fertility rate has fallen (1.4  
children per woman in 2018, from 2 in 1990), the migratory balance  
is structurally negative, the natural balance (births less deaths) has  
been negative since 2013, the population is ageing (17% were aged  
over 65 in 2018, from 9% in 1990) and the activity rate is below the  
European average (70%, compared to 74% in the EU in 2018  
according to Eurostat), particularly amongst women.  
Moreover, there are cyclical and structural factors that argue for a  
slowing of investment and thus the accumulation of the capital factor  
over the short and medium term. The rates of growth in investment  
seen over the past two years are not sustainable at the same level,  
given the expected downturn in the private investment cycle in  
machinery & equipment and construction and the expected  
reduction in disbursements from European structural funds for 2021-  
27 (public investment).  
In the absence of any increase in the quantity of labour, its quality  
has improved through better standards of education and skills in the  
labour force that has accompanied the increasing sophistication of  
production and exports. The share of the active population (aged 15  
to 64) educated to degree level or above rose from 10% in 1997 to  
Lastly, the quality of the business environment, the improvement in  
human capital and the quest for productivity gains through  
innovation and the shift up-market of Polish products will be  
essential to underpin economic growth in Poland over the medium  
and long term.  
27% in 2018 (Eurostat figures), bringing it close to the EU average  
of 29%.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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