Poland has become a major actor within the European Union (EU). With a population of about 38million, and a Gross National Income (GNI) per capita of $13,360 (2014, Atlas method), Poland has the largest economy in Central Europe. Since joining the EU in 2004, the country’s ambitions have been marked by the desire to fully catch up with the core of the EU in terms of economic development and living standards (Gross Domestic Product per capita currently stands at only 67% of the EU average) and to become one of the key participants in European debates.
Poland’s economic growth remains robust. In the first half of 2015, the economy expanded by 3.4 percent year on year, the same rate as in 2014 and up from 1.7 percent in 2013. Domestic demand increased by 3 percent and remained the main growth driver. Private consumption continued to benefit from higher real disposable incomes as a result of improved labor market conditions, relatively strong credit growth to households, and a boost from persistent consumer price declines. Investment was supported by solid corporate profits, growing confidence, record low interest rates, and final disbursements from the European Union’s (EU) previous financial perspective (budget).
The NBP’s Monetary Policy Council (MPC) maintains a relaxed monetary policy stance. The main policy interest rate was cut in October 2014 and in March 2015 by 100 basis points altogether, and the reference rate remains at a record low of 1.5 percent. Inflation remains well below the National Bank of Poland’s (NBP) 1.5–3.5 percent target range, affected by strong declines in food and energy prices. The headline inflation rate has been negative since July 2014, and in August 2015, consumer prices fell by 0.6 percent compared to one year earlier. Negative inflation in Poland is driven by low imported inflation from Eurozone trading partners and declining global food and energy prices. Poland’s real effective exchange rate appears to be broadly consistent with economic fundamentals.
The banking sector is well capitalized, liquid, and profitable, with stable credit growth. Capital adequacy is strong (at 14.9 percent in March 2015, 90 percent of which is Core Tier 1 capital) and liquidity is high. In 2014, the net profit of the banking sector exceeded PLN 16.2 billion (US$4.2 billion), a historical record. However, in the first half of 2015, net profit declined by 8.2 percent in comparison with the first half of 2014. The deleveraging of Eurozone banks has stabilized and the fall in foreign funding was offset by rising domestic deposits. Private sector credit grew by 7 percent in 2014, including a welcome pickup in credit to the corporate sector. In the first half of 2015, the year-on-year growth of bank credit oscillated around 7 percent.
Despite remarkable economic performance, Poland faces a number of challenges going forward. In the medium-term, Poland needs to improve the efficiency of public finances and do more to ensure that economic growth includes better those at the lower end of the income distribution. The country also needs to strike a balance between labor market flexibility and worker protection, and mitigate the existing duality of the labor market. Doing business reforms to encourage productivity and innovation remains another important reform area, especially in light of the changing demographics and aging society. Lastly, the country needs to manage the transition towards a low-emissions economy as it faces some potentially costly policy actions.