[REPORT] Opening Balance, 2022 edition. Poland in the face of external threats

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We present the eighth report in the Warsaw Enterprise Institute’s “Opening Balance” series. The purpose of these reports, always issued at the end of the calendar year, is to prepare for the opening of the new year. On the one hand, this is an attempt to summarize the achievements of Poland’s systemic transformation to date and the events of the year that is ending, and on the other hand, to identify the most important challenges that await our country in the coming years. Above all, we try to draw attention to the main goal that should accompany Polish economic policy, i.e. catching up with our western neighbor. Hence, every year we examine whether we are getting closer to Germany and – by how much? In addition, we examine our country’s position in areas such as international trade, state finances, and migration attractiveness. Our report operates on available annual data, but where possible supplements it with the most recent partial data (quarterly or monthly), which allows us to estimate current trends.

We’re chasing Germany at a record pace, but… too slow!

  • In 2018-2022, Poland caught up with Germany at a record pace. In 2021, we approached Germany by 2.2 percentage points (this year it may be just under 2 pp). Between 2018 and 2022, the rate of catching up with Germany averaged 2 pp per year – much higher than in the 2nd half of the 1990s. (1.4 pp. per year), in the 1st decade of the 21st century (1.3 pp.) and in the 2nd decade (1.1 pp.).
  • If we keep up the pace of catching up, we are likely to become as rich as Germany was in the 50s of the 21st century (plus or minus five years in the mid-1950s of the 21st century). Unfortunately, long-term trends show that we will, however, catch up with Germany more and more slowly. Some consolation is that we have already overtaken Greece and Portugal in terms of level of development (GDP per capita). Moreover, this process can be accelerated by bolder economic reforms and by improving the quality of institutions (such as laws) and economic policies. There are countries in the EU that are developing faster than Poland, and there are dozens of “faster” countries in the world as well. In recent years we have been declining in the quality of government, and the example of Ireland shows that with bold reforms it is possible to create a solid foundation for the development of a modern economy.
  • The economic growth of Poland and Germany are interdependent issues. Germany is our largest trading partner – thanks to this country’s market we have such large trade surpluses, which contributes to Polish economic growth. Both the value of exports to this country and its share in total exports from Poland – are growing: from 25 percent 10 years ago, to 29 percent in the last two years.

 

Main findings of the report

Good news:

  • Employees and employers are doing well. Poland’s unemployment rate is the second lowest in the EU. Poland’s corporate bankruptcy rate is one of the lowest in the EU.
  • State finances are in decent condition. In terms of the state of public finances, Poland’s situation does not differ from the typical situation in the EU: public debt is under control. We also see no other risks to the macroeconomic stability of the financial system. In our opinion, there is currently no risk of a financial crisis.
  • Poland is a major exporter of goods…. Poland has been the 22nd exporter in the world in terms of goods and 20th in terms of services for several years. Since 2015. (excluding 2018) we have a surplus of exports over imports. Never before in history has the value of Polish exports been so high. Between 2015 and 2021, the growth of Polish exports was the second highest in the EU. This shows the very great strength of Polish companies exporting goods. Poland is the EU’s largest exporter of car parts and accessories, seating furniture and several other groups of goods, and the runner-up in exports of batteries and diesel engines. Polish exports have undergone quite a transformation: there are still basic raw materials or cigarettes, but there are more and more knowledge-intensive products. In terms of furniture exports, we rank 3rd in the world. Exports of computers, headphones, hybrid cars are growing rapidly.
  • …and services. Exports of services from Poland accounted for 2021. 24 percent of merchandise exports – so they cannot be overlooked. Our country was ranked 7th in the world in terms of surplus in trade in services and 3rd in the EU, mainly due to motor transport, business and software services.
  • Poland is an immigrant country – increasingly so! Poland turns out to be the sixth-best EU country in terms of migration balance, the best result ever. Back in 2010. Poland had the largest migration deficit in the EU, but as of 2018, more people are coming to Poland permanently than leaving. Poland has become one of the most attractive migration destinations in the EU, including the most – among the new member states.
  • Immigrants contribute to the Polish insurance system. The number of foreigners, especially Ukrainians (71 percent share) insured in Poland is growing year after year (except for the turn of 2019-2020). The war in Ukraine did not translate significantly into these changes (increases were seen temporarily for a few months), after which the situation returned to previous trends.

Bad news:

  • Poland’s growth rate is gradually slowing down – in the mid-1990s we were the EU’s runner-up, and recently we’ve already been ranked 6th (and only 88th in the world). We started the pandemic period (Q1 2020) and ended (Q1 2022) as the third fastest growing EU economy. Currently (Q2 of this year) we are around 11th. This year will be much more difficult – according to IMF forecasts, we will be in 13th place in the EU, and next year we will only be in 21st place in the EU.
  • Inflation is delaying the process of Poles getting richer. Our last year’s forecasts have come true – inflation in 2022 has increased (as we predicted – also in Hungary and the Czech Republic). Part of the population is already feeling the consequences of rising inflation by changing the structure of consumer spending – reducing or abandoning more expensive goods in favor of cheaper ones. Real wages are falling – not only in agriculture, administration or SMEs, but throughout the economy.
  • The National Bank of Poland has suspended its fight against inflation. We verified the occurrence in the EU of the Philips curve concept, which was created in 1958 – the annual data shows no interchangeability between unemployment and inflation, which would suggest that the fight against inflation is not causing unemployment to rise. Hence, our central bank’s suspension of the fight against inflation this fall, which was touted as caring for the labor market (especially if public spending is expected to increase in the election year of 2023, which could further fuel price increases), when, moreover, we have the best labor market situation in 30 years and almost the best in the EU, is not justified by empirical data and could be considered a mistake.
  • The quality of governance is declining. The quality of governance is important for development. According to the World Bank’s World Governance Indicators (0-100 percent scale, where 100 percent is the maximum), Poland’s situation has deteriorated in recent years in terms of each of the six groups of indicators. As we calculated, the public’s admittance of influence on government declined by 22 percent in 2021 compared to 2015, perceptions of the rule of law declined by 15.5 percent, government effectiveness declined by 15 percent, control of corruption declined by 7 percent, and regulatory quality declined by 5 percent. The example of Ireland shows that the quality of governance (including the fight against corruption and clientelism), as well as inclusive economic policies, are important for a country’s development.
  • We are still trading with Russia. Russia in 2022 is still the third largest source of our imports – the value of these imports has increased by about 30 percent since the previous year, doubling the trade deficit with Russia.
  • We no longer have an exceptional trade surplus – we have a deficit! In 2020, our country ranked a high 25th in the world in terms of trade surplus, a record high in our country’s history. In 2021. However, Poland fell to a distant 101st place and recorded a foreign trade deficit, which we warned about last year. This year we will also have a deficit – perhaps even higher than last year.
  • In the long term, Poland’s attractiveness may decline due to real estate prices. The country’s attractiveness depends, among other things, on the cost of living, and more important among these is real estate spending. In 2020. Poland was the fifth country with the highest price growth among EU countries. After that, the market has cooled (recent price increases ranked 14th in the EU), and in larger cities, prices on the secondary market even appear The problem, however, is the rising cost of food and fuel.

 

POLISH VERSION OF THE REPORT

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