However, this did not happen by chance. The strength and resilience of the Polish economy to shocks are attributable to a combination of factors, including excellent economic policy decisions that avoided numerous potential difficulties and sources of weakness.
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The Challenge of the “Polycrisis”
The global economy has been hit by a series of severe negative shocks in recent years. These are often referred to collectively as a ‘polycrisis’, a phrase coined in the 1990s by sociologist Edgar Morin and popularised in reference to the current situation by economic historian Adam Tooze. According to Tooze, a polycrisis is a composite of several shocks that go beyond economic in nature, affecting social, political or geopolitical changes, among others. These shocks intermingle, making the ultimate impact of the disruption greater than the sum of the costs generated by individual shocks. There is no doubt that the world economy has experienced a shock of this nature in the recent past, dealing with the aftereffects of the Covid-19 pandemic and Russia’s military aggression against Ukraine.
Companies across the board were forced to slow down or even stop operations temporarily as the Covid-19 pandemic spread. As a result, international trade collapsed and supply chain disruptions persisted for many quarters. As a result, the relatively strong economic recovery after the pandemic encountered supply barriers, leading to an increase in the price of raw materials and many commodities. After Russia’s military aggression against Ukraine, commodity prices, especially energy prices, skyrocketed, leading to inflation in many countries at levels not seen in decades.
Poland, as a small open economy and at the same time a frontier country, experienced, like the rest of Central and Eastern Europe, a marked increase in prices. In 2022, annual inflation in Poland rose to 14.4 per cent. Significant increases in inflation were inevitable, given that oil prices were around twice as high as they were before the pandemic, natural gas prices temporarily increased by up to thirteen times, coal prices by five times, agricultural commodity prices by up to 70 per cent and shipping costs on occasion more than six times. Because of the severity of the supply shock, NBP’s monetary policy had to strike a delicate balance between two competing goals: keeping inflation from rising too high and keeping the economy from contracting, which could lead to a spike in unemployment.
Monetary Policy: Between the Scylla of Inflation and the Charybdis of Recession
In total, the Monetary Policy Council implemented the most severe monetary tightening in its history between 2021 and 2022, when it increased NBP reference rate from 0.1 per cent to 6.75 per cent. This year, prices have risen a lot less than they did last year. This is due to the clear response of monetary policy, which led to a drop in aggregate demand and credit, as well as the end of cost shocks in the economy. In September 2023, CPI inflation (according to the preliminary reading) stood at 8.2 per cent, more than 10 percentage points lower than at its peak in February this year. This was accompanied by a gradual reduction in core inflation. Moreover, according to all forecasts, inflation will continue to fall in the coming quarters.
Importantly, Poland has done better than many other economies at dealing with the effects of the pandemic and war. In particular, Poland escaped the severe recession that many countries experienced in the wake of the pandemic shock. Poland’s GDP decline in 2020 amounted 2 per cent and was three times shallower than the euro area average. Moreover, the Polish economy has quickly returned to a path of rapid growth. In Q2 2021, it was one of the first European countries to reach pre-pandemic GDP levels. Nor did the consequences of Russia’s armed aggression against Ukraine undermine Poland’s relatively favourable situation. In mid-2023, GDP was 7 per cent higher than immediately before the pandemic, compared to less than 3 per cent in the euro area. What’s more, Poland still stands out for its good labour market situation, with one of the lowest unemployment rates in Europe. Thus, the Polish economy once again emerged in good shape from the unfavourable situation resulting from external shocks.
Catching Up with the West
The skilful path that the Polish economy has traversed between the Scylla of inflation and the Charybdis of recession with its social costs is allowing the gap between Poland and Western European countries to narrow rapidly and in some cases even close. In terms of real GDP per capita (in purchasing power parity), Poland has already overtaken Greece and Portugal. If current trends continue, within the next decade it will be possible to achieve the same standard of living as the Italians, the French, and the British.
Rapid and stable development also translates into Poland’s growing importance both in Europe and worldwide. Poland is currently the 6th largest economy in the European Union. Its share of global trade is also growing, and Polish companies are participating in increasingly high-tech links in the value chain. For example, Poland has become a European leader in the production of batteries for electric cars. Polish service exports have also increased dramatically in recent years, as a result of which Poland has maintained a foreign trade surplus for many years. Therefore, it is not surprising that a wide stream of capital is flowing into Poland in the form of foreign direct investment, the inflow of which in 2022 exceeded PLN 140 billion.
The Anna Karenina Principle
Anna Karenina, one of Leo Tolstoy’s best novels, begins with the maxim: “All happy families are alike; every unhappy family is unhappy in its own way”. Tolstoy suggests that there are many contributors to a successful marriage or family, and that the absence of any one of them can spell disaster. The same holds true, albeit less dramatically, for economies in general and, more specifically, for an analysis of the factors that have contributed to Poland’s remarkable economic performance over the past few decades.
One of these, in addition to a well-educated workforce and a strong entrepreneurial spirit, is undoubtedly the economy’s extraordinary resilience to external shocks. Poland owes this in part to the significant geographical and product diversification of its economy: Polish goods and services are sold both on the relatively large domestic market and on foreign markets, where Polish producers place a large proportion of consumer goods, but also intermediate goods. As a result, while export growth is an important factor supporting economic development, weakening foreign demand does not generate as much disruption as in other economies in the region.
The absence of significant macroeconomic imbalances, including a low level of public and private sector debt, and a current account surplus compared to many other countries, cannot be overestimated either. As a result, Poland is not overly dependent on foreign capital: net foreign debt in relation to GDP has been clearly declining in recent years and in 2022 it was only 7 per cent.
The Polish zloty, along with a freely floating exchange rate, helps stabilise the economy and dampens the effects of external shocks. Having its own currency also allows Poland to calibrate its monetary policy to the specifics of its economy, allowing it to react to emerging disturbances at just the right time and in just the right way. In a period of heightened uncertainty about the impact of emerging shocks and the potentially varying impact of disruptions on individual economies, such an ability cannot be underestimated. It proved crucial after the outbreak of the COVID-19 pandemic, when NBP loosened monetary policy, but also with the worldwide spike in inflation. In 2021, NBP was one of the first central banks to react to the risk of elevated inflation becoming entrenched. NBP started raising interest rates sharply months before the major central banks did as soon as data indicated that the impact of supply shocks on inflation might be more permanent. As a result, in July 2022, NBP reference rate was already at 6.5 per cent, while at the same time the ECB was still maintaining negative interest rates. With inflation falling sharply and the economies of Poland’s main trading partners weakened, NBP has not hesitated to adjust interest rates to reflect domestic economic conditions. Of course, taking into account that the overarching objective of monetary policy remains a sustained reduction in inflation to the medium-term target.
In summary, Poland appears to have significant advantages over many other economies. These undoubtedly include resilience to external shocks of various sources and nature, its own currency, the absence of significant macroeconomic imbalances, and long-term rapid economic growth achieved while maintaining social cohesion. In line with the Anna Karenina principle, the combination of these factors can not only explain past successes but also allow us to look to the future with optimism.