Poland has become a major actor within the European Union (EU). With a population of about 38.2 million, and a Gross National Income (GNI) per capita of $13,080 (2013, 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.
Economic growth slowed considerably in 2012 and 2013. Overall GDP growth declined from 4.5% in 2011 to 1.9% in 2012 and 1.6% in 2013 amid slowing domestic demand. Investment declined as fiscal consolidation and lower EU co-funded investments curbed public investment, while private consumption was lackluster as a result of Euro Area recession, falling corporate and consumer confidence, high unemployment and subdued wage growth. Net exports, supported by the performance of German economy (Poland’s main trading partner) were the sole driver of growth from late 2012 to mid-2013.
Monetary policy remains accommodative. The Monetary Policy Council started an easing cycle in November 2012, cutting rates by a total of 225 bps, bringing the reference rate to 2.5%. With economic activity below potential, weak labor markets, and subdued consumer demand, annual headline inflation dropped to a record low of 0.2% in June 2013. Since then, the inflation rate has increased to around 1%, which is still well below the National Bank of Poland’s (NBP) target band of 1.5-3.5%. Poland’s real effective exchange rate appears to be broadly consistent with fundamentals.
The banking sector has remained well capitalized, liquid, and profitable, but credit growth has been weak. Capital adequacy is strong (at 15.7% in September 2013, 90% of which is Core Tier 1 capital), and liquidity is high. In the first nine months of 2013, the profit of the banking sector stood at PLN 12 billion, which is in line with results in previous years. The deleveraging of the Euro area banks continued in an orderly fashion: a fall in foreign funding was offset by rising domestic deposits. Private sector credit growth was slightly above 4% in December 2013, due to an increase in household credit - in particular consumer credit, and despite a decline in credit to the corporate sector.
Poland’s challenge is two-fold. In the short-term, Poland ought to further mitigate the impact of a difficult external environment and support a rapid recovery of economic activity. Beyond this horizon, Poland needs to avoid sharp declines in long-term growth potential resulting from the aging of society and the diminishing returns of its current “catching up” growth model. This will require action on a multiplicity of fronts, including but not limited to: enhancing the business environment, increasing innovativeness, and further strengthening public finance effectiveness.