The Island

“No man is an island, entire of itself.” as John Donne wrote but “every man is a piece of the continent, a part of the main.” I am not about to use a piece of seventeenth century poetry to try to justify why UK should remain part of the EU but rather to reflect on Poland’s economy at a time when, as an article in today’s Financial Times states, the myth of Poland as the only “green island” of growth amidst a red sea of recession elsewhere in the EU may be about to be busted. But is it?

Although there is certainly a slowing down of growth in consumption, investments and exports Poland should still avoid a technical recession (a reduction in GDP over two successive quarters) with something over two per cent growth this year and, according to OECD estimates, 1.6 per cent in 2013. So while the Polish government has been patting itself on the back for having avoided a recession thus far (or for having “sat this one out” as I have written here before in The Banker) – although there seems a belated admission that Poland is not immune to what happens elsewhere, especially in Germany, its largest trading partner – it is worth reflecting on two points. First, unemployment in Poland, a country not in recession, remains at 12.5 per cent which contrasts rather unfavourably with the UK, a country in recession, at 7.9 per cent. Second, GDP figures are not directly comparable between economies at different stages of development. Thus two per cent growth in a developed economy is a respectable result, but a developing economy would require twice that to keep moving forward.

Be that as it may, the fundamentals of the Polish economy remain sound and will be helped by another large injection of funds from the EU in the next budget period. Even though the amount is likely to exceed the €68 billion received the last budget and, remarkably, seems not to satisfy the Polish politicians’ sense of entitlement, the effect will still be to contribute about 0.7 per cent to annual GDP growth. This is just as well because, despite the slowing down of the economy, the authorities do not see the need for any dramatic policy changes or, to put it another way, if you are sitting it out, you don’t need to worry about changing your dance steps if the music changes.

The president of the National Bank of Poland sees the current slowdown in Poland as significant but not dramatic and considers a recession unlikely. The slowdown is cyclical and Poland is in a better position than many other western countries because there is not a high level of household debt, there has not been the same real estate bubble and exports have remained competitive. In other words, in the view of Marek Belka, there are no major structural hurdles or economic imbalances that would have to be dealt with before more the economy could grow more rapidly again. Reflecting expectation of a further slow down, interest rates were cut this month by 0.25 per cent to 4.25 percent following an equal cut in November.

This view that dramatic action is necessary is shared by the Minister of Finance who said that the government sees no reason to make changes to the 2013 budget bill as a result of the current slow down since weakening of the Polish economy is serious enough to justify any changes. Poland’s economy grew 1.4 per cent in the third quarter of this year and the budget bill assumes a 2.2 per cent GDP growth next year, average annual inflation of 2.7 per cent and unemployment of 13 per cent. The keen reader will already have spotted that the growth figure are more optimistic than the OECD estimates so it remains to be seen whether any remedial action might become necessary later.

All in all, Poland’s economy seems likely to avoid recession, which is good news. While not exactly an island, Poland has avoided – for time being at least – being submerged in the recessionary waters surrounding it.

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