Poland to continue to prosper
Almost three decades removed from communist rule, Poland has emerged as the growth engine of the Central European economy. From its inclusion in the EU, to its strong future growth forecast, there are numerous reasons that highlight Poland as a potential investment destination.
Poland’s long, often dark history has been wrought with hardship. The formal beginning of World War II was marked through the invasion of Poland on 1 September, 1939. By the end of the war, Poland had lost over 6 million people, more than 20% of its prewar population.
44 years of communism followed, prior to its collapse in 1989 after Poland’s first partially free and democratic elections since the end of the war. The early 1990s saw significant reforms that allowed the country to transition from its socialist-style planned economy into a market economy.
The two-and-a-half decades since has seen Gross Domestic Product (GDP) rise from USD$1,731 per capita in 1990 to USD$12,399 per capita in 2016. This was the fastest growth amongst all OECD nations. GDP per capita is still only just over a third (34.8%) of the European Union (EU) average, leaving strong upside for future growth to occur.
Poland and the European Union
Poland joined the EU in 2004, along with nine other nations. Between 2007 and 2013, Poland received approximately €67 billion, making it the largest beneficiary of the European Cohesion Policy through this period. For the period of 2014 to 2020, this allocation has been increased to €86 billion.
However, Poland’s time in the EU hasn’t all been smooth sailing. Late last year, the European Commission triggered an unprecedented sanctions procedure against Poland, contending that the Polish government had effectively seized control of the judicial system.
While there are serious concerns about the threat to the independence of the judiciary, market commentators have considered it unlikely that this divide will escalate, with Hungary in particular vowing to vote down any further European Commission action.
Mastering their own destiny
Through the two years of Poland’s dispute with the EU, there have been no adverse effects to the economy. A surge in Polish domestic investment last quarter was a sign that the economy was unaffected, even as tensions heightened.
While it is unclear whether Poland will remain the largest net recipient of funds in the EU bloc’s post- 2020 budget, the Polish government is increasingly focusing on facilitating growth and development on its own terms.
One such example is the decision to not renew a contract that sources nearly two-thirds of Poland’s gas from Russia, thereby ending a reliance that has spanned 74 years. From 2022 onwards, Poland’s gas will be sourced from liquefied natural gas (37% - up on 2017’s 11%), its own production (20%), and a newly formed reliance on Norway (43%).
The past positioning the future
The ongoing resilience of the Polish economy has positioned it well for continued expansion. Throughout the 2008 Global Financial Crisis (GFC), Poland was the only EU member that did not fall into a recession. In 2009, while the GDP of the EU declined by 4.5%, Poland’s grew by 1.6%.
At the onset of the GFC, Poland’s public debt was below 50% of GDP, low in comparison to other European countries. This, in part, was the result of a clause written into the country’s 1997 constitution limiting government borrowing to 60% of GDP.
Coupled with a large and growing domestic economy, increasing domestic consumption, a business-friendly political class, very low private debt and a flexible currency, sound economic management saw Poland avoid recession.
A strong economic horizon
A decade on from the GFC, the Polish economy is forecast to remain one of the fastest growing European economies throughout 2018. Growth is set to remain strong at 3.8%, down slightly on 4.4% in 2017. The key growth driver for the economy now is private consumption.
In Q4 2017, growth surged to its strongest level in six years, powered by a mix of consumer demand and an investment rebound. This is expected to continue in 2018 with investment growth set to reach 4.5%.
The labour market continues to tighten, with the unemployment rate sitting at 6.7% as of November 2017. This is largely the result of profound changes in the labour market. Poland’s population is ageing, meaning fewer workers in the labour force. Additionally, technological and structural change in the economy is changing the demand for workers. Both of these ‘push and pull’ factors have resulted in a decreasing unemployment rate.
A comprehensive series of education reforms Poland has pursued since the early 1990’s has also given rise to a highly-skilled
and largely educated workforce. These reforms have been so successful that they are, in part, responsible for the rising employment and wage pressures that mean real income is growing faster than inflation.
Poland as an investment destination
Market demand, market cost, exchange rate, sovereign credit and trade credit risk ratings for Poland are all significantly lower than the respective emerging market averages. Additionally, Poland’s score of 62.0 on the Corruption Perception Index is far better than the emerging economies average of 38.0.
In 2017, Poland’s zloty surged 5.4% against the Euro, the second-best performance amongst emerging market peers.
Foreign investors see Poland as an attractive investment destination due to its economic stability, educated workforce, potential consumer base, as well as its strategic geographic position being surrounded by Germany, Slovakia and the Czech Republic.
As Poland continues on the growth path that was kick-started just over two decades ago, GDP and living standards have further to rise. Even as growth tightens slightly through 2018, the likelihood is that it will continue to be well above the EU average for the immediate future.
Polish economy at a glance