Swedbank Baltic Sea Analysis No. 32/2012:

1. Swedbank Baltic Sea Analysis No. 32  28 May 2012
Poland
Europe’s ‘growth star’ is losing luminosity – but
remains among the region’s strongest economies
 After Poland’s GDP growth reached 4.3% last year, we
anticipate a slowdown to 2.7% this year and 3.2% next
year. Weaker exports, lower investments and rising un-
employment are squeezing domestic demand.
 The crisis in the euro zone is making it easier for the go-
vernment to delay EMU accession. Although it says the
convergence criteria will be met by 2015, it is unlikely that
the zloty will be pegged to the euro in ERM2 in 2013.
 The crisis in the euro zone could reduce growth and com-
plicate the budget consolidation. Additional measures are
needed to reduce the structural deficit to 0,5% of GDP by
2015. To remain competitive in the long term, Poland
must increase value-added in its manufacturing through
increased investment in innovation, new technology,
education and infrastructure. Increasing participation in
the labor market should also be high on the reform
agenda.
Several reasons to talk about Poland
On January 1 Poland handed over the EU Presidency to Denmark Poland’s
after a hectic fall. On the one hand Poland flaunted the fact that it self confidence
survived the global recession and financial crisis better than many has grown
other countries. On the other hand, being outside the euro has made
Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46 (0)8-5859 7740
e-mail: ek.sekr@swedbank.com Internet: www.swedbank.com Responsible publisher: Cecilia Hermansson +46 (0)8-5859 7720.
Magnus Alvesson +46 (0)8-5859 3341, Jörgen Kennemar +46 (0)8-5859 7730 ISSN 1103-4897

2. it difficult for Poland to lead the region with all its problems. The euro
zone’s crisis at the same time has allowed Poland to delay
membership, though it is keeping the process alive by using the
coming years to meet the convergence criteria. Instead of focusing on
whether it qualifies for the EMU, Poland is now asking what the euro
zone has to do to convince it to join. Self-confidence is high and
understanding of the country’s importance has grown.
Outgoing Chinese Prime Minister Wen Jiabao recently visited Poland,
which China still sees as one of the countries that offer a pathway to
Eastern and Central Europe. There are huge investment needs here,
but also a strong domestic market that has kept the economy
churning despite global uncertainty. Now the risks are growing for the
Polish economy as well, with conditions weakening, though the
outlook remains fairly good.
The economy is slowing – but growth remains decent
There are several reasons why Poland’s economy didn’t shrink during A mix of factors
the 2008-2009 crisis, as many other countries did. When the global explains Poland’s
crisis began, fiscal policy was loosened, which kept households in a ability to withstand
spending mood. The floating currency, the zloty, fell substantially and the crisis
provided support for the export industry. A flexible labor market, low
debt levels and a relatively stable financial sector also helped to keep
growth on the plus side. Moreover, subsidies from the EU’s structural
funds were important factor in keeping investment alive.
It is also important that Poland’s economy is less export-dependent
than many other smaller EU countries. The export sector is less
focused on input and investment goods, and agriculture is still
important. Nearly 13% of the labor force is in the latter sector, which
accounts for only about 3.5% of GDP. As a result, Poland’s exports
aren’t as vulnerable to fluctuations as Sweden's or Finland’s.
Poland’s GDP based on the supply balance’s various components
(annual change, %)
2 Swedbank Baltic Sea Analysis No. 32 • 28 May 2012

3. GDP grew last year…
Poland’s GDP grew by 4.3% last year (against 3.9% in 2010 and 1.6%
in 2009). In the fourth quarter of 2011 the economy grew by 4.4% at
an annual rate and 1.1% on a quarterly basis. In other words, the
Polish economy continues to perform strongly. Household
consumption rose by 3.1% and investments by 8.3% at an annual
rate. High investment growth is partly due to this summer's European
football championship, which is being co-hosted with Ukraine. Major
investments in the public sector are also being financed with the help
of the EU’s structural funds.
We expect GDP growth to decelerate to 2.7% this year and 3.2% next … but now the
year. This is a total of 0.5 percentage points lower than in our Baltic economy is slowing
Sea Region Analysis in October 2011. Several factors suggest that slightly
the economy is slowing. Global demand is falling, which is impacting
Polish exports. After the European football championship, the rate of
investment will decline. Fiscal policy is being tightened.
Unemployment is rising and inflation is relatively high, which is
dampening the mood of households. Surveys point to slightly lower
future confidence and declining consumption and investment. In
manufacturing, the purchasing managers index indicates a slowdown
with fewer new orders.
Confidence in the economy (index) and in manufacturing, according to the
purchasing managers index (PMI) and the index for new orders
Poland’s competitiveness – despite success, more
structural reforms are needed
In the 2000’s Poland gained share in the global export market, like Poland gained market
many other Eastern and Central European countries, while Western share in the 2000’s
Europe lost ground. In 2010 the trend was broken and Poland’s with the exception of
market share dipped, though it is too early to say whether this was 2010
the start of a downward trend.
Swedbank Baltic Sea Analysis No. 32 • 28 May 2012 3

4. Market share, index 2000 = 100
200
180 CZ
160
DE
140
120 PL
100 SK
80 LV
60 SE
40
FI
During the global financial crisis and recession production fell
significantly in countries such as Germany and Sweden, while the
labor force shrunk slightly. Unit labor costs rose. In Poland production
didn’t drop to the same degree, productivity rose and costs per unit
produced continued to improve.
Unit labor costs, index 2005 = 100
Poland Germany Sweden
150
140
130
120
110
100
90
80
Although the industrial sector has remained competitive, the Polish Poland has to increase
economy still faces structural problems that threaten its long-term participation in the
development. The employment rate, i.e., the percentage of the labor market
working-age population that is employed, is only 66%. Unemployment
has risen and since November has topped 10%, according to
Eurostat, rising to 12.9% in April, according to national data.
There are significant regional differences, however, with
unemployment relatively low in the capital and industrial areas to the
south, but higher in the eastern and northeastern sections of the
country. This is also evident in regional income differentials, with GDP
4 Swedbank Baltic Sea Analysis No. 32 • 28 May 2012

5. per capita reaching slightly over 56 000 zloty per year in Mazowieckie,
which includes the Warsaw area, but below 24 000 zloty in
Lubeleskie to the east, according to the Polish bureau of statistics.
Furthermore, differences are increasing between generations, with
youth unemployment having risen to nearly 27%, exceeding the EU
average of about 23%. According to the ILO, the number of young
people working temporary jobs has increased more than in any other
country in the 2000’s.
Unemployment and inflation (as well as core inflation excluding food and
energy prices)
At the same time there is a growing mismatch in the Polish labor More companies are
market. Industrial and service companies are having a harder time having difficulty finding
finding skilled workers, while unemployment is rising. Focusing more skilled workers, at the
on innovation, education and research should be high on the reform same time that
agenda if Poland is going to remain attractive as it loses its low-cost unemployment is rising
status.
China’s Prime Minister, Wen Jiabao, visited Poland in April, the first China and Poland plan
visit by a Chinese prime minister since 1987. China has committed to increase trade
USD 10 billion in loans to stimulate investment in Eastern and Central
Europe, to be used for, among other things, infrastructure, technology
and a green transformation. In addition, a USD 500 million fund is
being created for Chinese investment in the region. China’s goal is to
double trade with Eastern Europe to USD 100 billion within three
years.
Right now, however, trade relations are out of balance. While Polish Trade is out of balance
exports to China amounted to 1.3 billion euro, imports were nearly 10 – China’s exports are
times higher. Poland has now started a program, “Go China,” to help 10 times as high as
its companies do business in China. Trade is expected to grow in the Poland’s
areas of food and chemicals in particular. There is plenty of room for
mistakes along the way, however, and Poland’s many small and
medium-sized companies face considerable challenges. China
Swedbank Baltic Sea Analysis No. 32 • 28 May 2012 5

6. certainly sees Poland as a gateway to Europe with its large market,
low labor costs, significant need for investment and decent growth.
Being able to test its consumer products in the Polish market is
another advantage for China.
Poland leans on its own monetary policy – euro
accession will wait
The Polish export sector received plenty of help in fall 2008 from a During the crisis a
weaker zloty, in combination with lower interest rates, which also lower zloty supported
gave a boost to the domestic economy and financial sector. The zloty exports – now the
fell by just over 50% against the euro at its low point between August currency is again
2008 and February 2009. It then rose until last year's turbulent falling
summer, when a flight to safety led to its appreciation and forced the
central bank to intervene. After rising since the beginning of the year,
renewed concerns in the euro zone are pushing the zloty lower, which
may seem paradoxical since the Polish economy isn’t a source of
concern. On the contrary, Poland's macroeconomic development is
strong and the central bank has raised interest rates. The reason
instead is that risk aversion has increased, which is affecting the
appetite for emerging market currencies.
Currency and interest rate trends
On May 9 the Polish central bank surprised the market by raising its The rate hike in May
benchmark rate by 0.25 bp to 4.75% when it felt that it had to curb was questionable – a
inflation, which had risen to 4.1% in April, with even higher weaker economy
expectations going forward. Of course, the central bank might want to will reduce inflation
excuse the fact that inflation has stayed above the target rate of 2.5%
+/- 1pp for as long as 16 months, since it is mainly due to higher
commodity prices, increases in certain publicly set prices and the
earlier depreciation of the zloty. Underlying inflation is estimated at
2.7%. Now that economic growth is slowing due to weaker global
development, higher unemployment, tighter fiscal policy and weaker
confidence, inflation should gradually ease later this year. Though the
6 Swedbank Baltic Sea Analysis No. 32 • 28 May 2012

7. zloty is weakening again, it probably won’t drop as far as late 2008,
and more expansive monetary policy will probably be needed to avoid
too much of a slowdown in the domestic economy.
The euro crisis has made it easier for the government to delay joining The euro crisis is
the euro zone beyond 2015, as previously planned. Now it is saying delaying Poland’s
that it will meet the convergence criteria by 2015, but that Poland isn't entry into EMU as well
likely to peg the zloty to the euro within ERM2 as early as 2013, as ERM2
which it would have to do to meet the criteria.
Prime Minister Donald Tusk has expressed his continued support for Though not a member,
eventually adopting the euro as an EU member, but has also said Poland wants a say in
that it won't be possible until the currency union’s rules are followed the euro zone’s
by every member country. Poland’s desire to influence policy in the economic policies
euro zone despite not being a member was on display when the new
fiscal pact was agreed on. Only by taking part once a year in the euro
zone’s meetings would Poland be able to join the pact. Unlike smaller
EU countries which will eventually join, Poland, with a population of
around 38 million, feels it should have an influence right away. To a
growing extent Poland is asking what the euro zone should be doing
to encourage it to join rather than whether Poland will meet the
convergence criteria.
Fiscal policy – more to be done
Poland has a rule stipulating that if the national debt exceeds 55% of Dangerously close to
GDP, it must be slashed in the following year’s budget. In 2010 the the debt ceiling and
deficit reached 7.8% at the same time that government debt edged Poland has raised its
dangerously close to the 55% limit, at 54.9% according to the consolidation aims
Maastricht definition and 52.8% according to the national definition. It
was obvious that Poland had to tighten its fiscal policy to meet the
EU’s excessive deficit procedure (EDP) and the Maastricht deficit limit
of 3% of GDP as well as its own national debt requirements. The goal
was to reduce the budget deficit to 5.6% in 2011, 2.9% in 2012 and
2.5% in 2013. In addition, there is the fiscal pact’s requirement to limit
the structural budget deficit to not more 0,5% of GDP by 2015. Given
the upcoming parliamentary election, the target for 2013 may have to
be slightly more ambitious.
At the same time the euro zone’s crisis is slowing Poland’s GDP
growth, making it more difficult to reach the budget targets. It seems
that last year's deficit goal was met partly through VAT hikes, public
spending limits and distributions from state-owned enterprises. The
strong growth contributed to higher corporate tax revenue. Another
move was also to reduce transfers to the pension system’s second
pillar, which lies outside the budget, from 7.3% to 2.3% of gross
wages and instead credit the corresponding amount to the pension
system’s first pillar, which is included in the budget.
Changes in the pension system that were adopted by parliament in The decision to raise
late March raise the retirement age for both men and women to 67 the retirement age to
from 65 for men and 60 for women. The new law will be implemented 67 is unpopular but
gradually through 2040. Although it has already passed, members of necessary
the Solidarity trade union are still demonstrating. Considering
Poland’s worsening demographics, such measures are necessary. A
generous pension system for two million disabled Poles is also under
Swedbank Baltic Sea Analysis No. 32 • 28 May 2012 7

8. review. Several fiscal reforms to increase supply in the labor market
will benefit the economy and budget over the longer term.
Advantage Poland – but nothing is permanent
At this point Poland’s relative position is good despite the chances of
an economic slowdown. The convergence with the rest of Europe is
continuing and will mean higher growth and productivity, but also
higher prices and costs. It is essential therefore that Poland remains
competitive by attracting foreign investment that increases economic
dynamism and by investing in skilled labor, new technology and
infrastructure.
There seems to be little likelihood at present that Poland will develop
its own imbalances and bubbles, and the risks in the banking system
have lessened now that Swiss franc loans are no longer as much of
an issue. At the same time it is always important in the age of
convergence for countries to be vigilant about imbalances. Diligence
in creating strong institutions and fundamentals will be rewarded in
time.
Cecilia Hermansson
Economic Research Department
SE-105 34 Stockholm Swedbank Baltic Sea Analysis is published as a service to our
Telephone +46-08-5859 7740 customers. We believe that we have used reliable sources and
ek.sekr@swedbank.se methods in the preparation of the analyses reported in this publication.
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ISSN 1103-4897
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8 Swedbank Baltic Sea Analysis No. 32 • 28 May 2012