Compared to Q4 2019, the last quarter before the first sudden shock – a several months’ long paralysis of the global economy caused by the outbreak of the coronavirus pandemic – Poland’s GDP grew by 7 per cent by mid-2023, more than twice as much as the EU’s GDP during this period. The Polish economy is the sixth largest in the European Union, and none of the bigger Member States grew faster during this period. Germany, Europe’s largest economy, is barely back to its pre-pandemic size, and Czechia’s GDP is still 1 per cent lower than at the end of 2019.
Institutions Worked Well
A rapid return to the previous growth trajectory helped the good performance of the Polish economy. Poland made a timely decision to support the economy with public funds. According to a study by economists at the Warsaw School of Economics published in 2022, Poland spent the equivalent of 5.8 per cent of GDP on subsidies for companies, wage subsidies, furlough benefits, additional social benefits, and other forms of aid. These figures do not include liquidity aid to businesses.
The role of the central bank and the Monetary Policy Council in supporting liquidity and the safety of the financial system was instrumental. Interest rates were cut to historic lows while the significant purchasing of bonds issued and guaranteed by the State Treasury facilitated the rapid mobilisation of financial support for companies and households.
An efficient institutional response was of paramount importance in overcoming the crisis. Moreover, according to economists, the structure of the domestic economy, with manufacturing playing a greater role than in other European countries, largely helped to avoid a deep slump.
The Power of Industry
Manufacturing generates almost 28 per cent of Poland’s gross value added (GVA), the highest percentage in the region and much more than in the EU’s most advanced economies. By comparison, in Germany, where manufacturing is also crucial, its share of GVA is about 24 per cent. In France, manufacturing accounts for about 13 per cent of the value of goods and services.
/>
Meanwhile, the pandemic and the related bans and restrictions imposed on businesses mainly hit the service sector. Countries which largely rely on tourism were hit particularly hard. As a result, the decline in GDP in H1 2020 was smaller in Poland than in many other European countries, shrinking the distance between them.
The strength of domestic manufacturing lies in its diversity, which is why it has not suffered as much as, for instance, its German or Slovakian counterparts, where the automotive industry is the most dominant. The latter was hit hard by the pandemic disruptions of supply chains and problems with chip deliveries, another one of the consequences of the health crisis.
Although industrial production in Poland has declined in recent months, in June, after seasonal adjustments, it was still 22 per cent higher than at the end of 2019, and in August, it was 21 per cent above the 2019 level. This places Poland among the EU leaders. As with the rate of GDP growth, Poland has overtaken all larger EU economies.
Wartime Inflation
On 5 May 2023, the World Health Organisation announced that the epidemic emergency associated with COVID-19 was over. However, the economy ceased to be affected by only some of the economic damage caused by the pandemic. For example, global supply chains have been restored. The Global Supply Chain Pressure Index (GSCPI) calculated by the New York Fed, which covers a range of data related to the cost and timing of deliveries of goods and components in the global economy, has bounced back to lows previously recorded at the end of 2008 (the lower the GSCPI, the fewer supply problems there are).
The most important negative consequences of the pandemic have been the historically deep recession in 2020, which affected many countries that year, and inflation, which is still having a strong effect on the global economy. In many countries, inflation was mostly the result of increased government spending and the transfer of funds to households combined with extremely relaxed monetary policy and a reduction in the supply of goods due to disrupted supply chains. According to many economists, inflation in Poland has been triggered primarily by external factors, responsible for demand/supply shocks.
Inflation recorded globally in 2023 is largely a consequence of the ongoing war in Ukraine. However, energy commodity prices began to surge months earlier, when the Kremlin started to blackmail Europe by restricting supplies and driving up commodity prices, primarily energy. Until recently, the most important vendor covering approximately 37 per cent of demand and 41 per cent of imports, Russia practically stopped natural gas supplies to the European Union via pipelines in the summer of 2022. Europe faced the spectre of a long winter with heat and power shortages.
The inflation indicator rose in many leading global economies to the highest levels in many decades, including the euro area, the UK, and even the USA. The trend has not spared Poland either.
Problems in the East and the West
The rise in inflation meant that the real income of the population began to fall. In Q2 2022, the rate of growth of consumer prices became higher than the growth of average wages in the economy (the rate of growth of consumer prices exceeded the rate of growth of wages in the corporate sector in May 2022 and remained higher also in June 2022. In July, this relationship reversed. From August 2022 onwards, the CPI again rose above wages and this relationship persisted until June 2023).
This led to a consumer recession in H1 2022, as evidenced, among others, by a decline in retail sales in real terms. Faced with uncertainty induced by the war, households decided to postpone major expenditures, such as the purchase of furniture or white goods. Similar trends were observed across almost all European economies.
As household demand has been the most important driver of GDP growth in recent years, the reduction in spending caused the economy to decelerate sharply.
The environment around Poland’s economy looks different to the one during the recovery from the pandemic shock. One of the countries hardest hit by the consequences of the war is Germany, Poland’s largest trading partner, which receives more than a quarter of Polish exports. In late 2022 and early 2023, Germany found itself in a technical recession, recording a decline in GDP for two consecutive quarters. Q2 GDP did not budge quarter on quarter, and weak data at the start of Q3 suggest that the economy is contracting again. According to the European Commission’s estimates presented in its latest economic forecast update published in September, Germany’s GDP will fall by 0.4 per cent this year. According to International Monetary Fund forecasts, Germany will be the only G7 country to record a decline in GDP this year.
Confirming the difficult external conditions for Poland’s economy, exports of goods and services in Q2 2023 fell by 2.7 per cent year-on-year at constant prices. The last time Poland recorded a decline in exports, excluding the pandemic, was in 2009, during the previous global crisis.
Back on Track
Considering that the period in question, one beset by the challenges of two global shocks, has ended in a quarter of unfavourable growth for Poland’s domestic economy, it is all the more important to recognise Poland’s leading position in the European Union as measured by many economic statistics.
According to economists’ broad consensus, the economic cycle bottomed out in Q2. Falling inflation, with wage growth still high, means that real incomes are rising (the latest available data shows that in August we had the highest growth in private-sector wages since February 2022, by 11.9 per cent with inflation at 10.1 per cent) and at the same time consumer sentiment is improving. This suggests that the domestic economy has started to get back on track in the second half of 2023.