PUTTING THE LENSES on Poland's biggest trading partners, we can see somewhat sustained steps toward opening up the economy support the expansion in the service sector and thus the dynamic economic recovery. In the second half of the year, the Eurozone economy should benefit from the first injection of funds from the EU recovery plan. Despite expected growth rates of 4.4% for 2021 and 4.1% for 2022, the European economy will not approach its potential before the end of 2022 at the earliest. That means price pressure will remain low over the medium term, even though inflation will rise significantly this year due to the base effect and factors as energy prices and disrupted supply chain.
It is not any different in Poland. The government and central banks eased further the monetary policy supporting struggling businesses and local communities facing sanitary lockdowns. However, Poland seems to be on the path to change. The NBP president's rhetoric has changed. He earlier gave a pledge that rates will be unchanged "for long" or "until the end of the MPC term of office," QE will live "forever," and thinking about the policy tightening is "absurd." It is now replaced by new guidance: the NBP will not hesitate to hike when needed.
The picture in the CEE looks robust based on better than expected 1Q21 GDP data. Stronger global economic outlook stemming from a better epidemiological situation than the rest of the EU, the 2021 GDP forecast for Poland was raised to 5.1% from 3.8% a quarter ago. The recovery has been driven by industrial output, export of goods and public consumption, while restrictive measures and uncertainties decreased private consumption. The most substantial risk to recovery is seen at the supply side, where industrial production can be limited by a shortage of intermediary products (i.e., semiconductors) and an increase in input prices (i.e., labor, energy). Hence, inflation is above average for both this year and the following until the supply side adjusts to satisfy the abrupt increase of demand.
ECONOMY OUT OF THE WOODS?
Reflecting on the past few months, the fear of a third wave seems unfounded and replaced by optimism and an upward revision of economic activity. Autumn is upon us and anxiety about a fourth wave and the potential of yet another restrictive policy. However, the economic readings paint a positive picture, with GDP growth forecast nearing 5% in 2021 and 2022. Furthermore, Poland is on the path to be among the first ones in Europe to return to the pre-pandemic output level benefiting from the global trade revival and manufacturing boom. Ideally, domestic demand will continue its solid pace supported by businesses' healthy balance sheets and a tremendous amount of household savings. The EU's recovery fund should provide additional liquidity to boost mostly public investments.
Moreover, the continuation of economic expansion will likely push the labor demand even higher, with job vacancies rebounding quickly, generating mounting upward pressure on labor costs and increasing the risk of wage-price loopback. Firms seem to be well-prepared to cope with that increase thanks to record-financial results.
A SURPRISE REBOUND
To everyone's surprise, investment increased by 1.3% year-on-year real terms in Q1 2021, with a growth forecast of 14.5% y/y for the entire year, according to Santander Bank Q1 report. However, the recovery from -15.4% in Q4 2020 to 14.5% in 2021 is mainly driven by big companies (employing 50+) from -5.6% y/y to +4.6%. We have also seen a rebound in investment in transport and machinery by 3.2% y/y in Q1 2021 from -7.4% in Q4 last year. However, investment in local government is still underwater as it declined by 19.3% y/y in Q1 2021.
Although the argument of a good financial situation of business means they'll turn to investment mode remains valid. However, that mode switch will not happen that fast as fears and uncertainties remain high due to a potential lockdown and the risk of higher taxes as a result of the “Polish Deal.” Nonetheless, Statistics Poland's (GUS) latest reports state an upswing of investment in the household (primary dwellings), as confirmed by high volumes of flat and housing mortgages sales supported by favorable labor market situation, low real interest rates and resumed inflow of immigrants from the east. Although investment in infrastructure is lagging behind other sectors, we expect a rebound correlated with massive investment programs promised by the government in the upcoming quarters, namely a PLN 7.5 billion in a signed contract until early June by the GDDKiA overseeing road investments. It is also essential to note a peak in the medium run in local governments' investments dependent on the EU's funds.
Overall, investment activities in the economy seem to keep a good momentum in 2021 with a positive outlook for 2022.
According to AmCham's report published earlier this year, the value of assets held by businesses with foreign capital operating in Poland had increased by 70% from 2010 through 2018, reaching a total of $415 billion. The leading foreign players continue to be Germany, the United States, the United Kindom and France. Together, businesses from these countries represent almost half of FDI inflows to Poland. Though the question is, is Poland an attractive destination for foreign investment? The answerer is yes, despite being ranked second in Europe and tenth globally when it comes to the complexity of doing business, according to the latest edition of a ranking that analyses rules and requirements in 77 countries worldwide.
Foreign investment flows have remained stable in the last two decades at slightly over $13 billion. Poland is considered the largest recipient of foreign direct investment in Central Europe. Despite the fact we have seen a steady increase in wage cost in the country, Poland provides high-quality production at a low cost, especially compared to Western Europe. According to statista.com, the average hourly rate in Poland remains low at $13 compared to $33.8 in the United Kingdom, $43.4 in Germany, $44.5 in France and $54.3 in Denmark. Hence the return on invested dollars will be much higher than the home countries of those funds.
Furthermore, constant investment in Poland has created a favorable environment for the upskilling workforce and pushed education institutions to adjust their curriculum to meet the needs of a skillful workforce at using modern technologies and know-how in the execution of various operations. That hasn't gone unnoticed as OECD reports read Poland as one of the busiest nations in Europe, wherein 2020, the average number of hours spent at work was 1,766. That's more than the OECD average of 1,687 and far more than Germany's 1,332. The OECD reports also indicate that seven out of 10 educated adults in Poland have a master's degree versus an average of three across OECD countries. The report also illustrates that 42.5% of Poles aged between 25-34 have higher education, putting Poland in a higher position than the EU's average of 35%. Moreover, Poland ranked 16 out of 100 in the EF English Proficiency index 2021, which is essential for foreign businesses conducting business in Poland.
Ben Esmael is a Poland-based strategic advisor, investor and writer, and co-founder of Corporate Break – “a non-profit think-tank and experience-sharing platform focusing on helping individuals learn, professionally grow and make well-informed decisions.”