There is No Deflation in Poland: Interview with Franziska Lieselotte Ohnsorge

February 4, 2015

Franziska Lieselotte Ohnsorge RZECZPOSPOLITA (Polish)

A number of international financial institutions, including the World Bank, have recently revised their forecasts for the global economy downwards. How do you reconcile this with a clear decrease in crude oil prices - which should be conducive to growth for most countries in the world - and increasing dynamic growth in the USA – which is still the largest economy in the world?

Publications on this topics suggest that a 30% decrease in the average annual price of crude oil should increase the global economy growth rate by approximately 0.5 percentage points. However, we believe such a scenario would be overly optimistic. First, today’s oil price decrease results largely from weak demand for this raw material, and, as such, a reflection of a slowdown of the global economy. Second, in the past, decreases in the price of oil prices have had an impact on economies mostly through the reaction of central banks, which, in such situations, have relaxed their monetary policy. Now, when interest rates in many countries are at a record low, central banks cannot do much to improve the economic climate. Therefore, we believe that a decrease in the price of oil will increase the growth rate of the global economy by approximately 0.1 percentage points. This effect is so small that it can be offset, and then some, by individual regions and countries specific problems, which make their outlook worse. Such problems are evident in Russia, or the euro zone, but experienced also in Brazil, Indonesia, and many other countries.

Record low interest rates are maintained also by the Federal Reserve, although the US economy - if we are to believe the forecasts - is going to grow at the fastest rate in a decade…

According to our forecasts, the USA’s growth rate will exceed its potential this year and next. This creates a risk that the Fed will be late in tightening the monetary policy, but for now the US economy seems stable. Another issue is that a normalization of the monetary policy may also result in certain problems – if not in the USA, where the good economic situation does not exclusively result from low interest rates, then abroad, for example in developing countries.

How is it that after the financial crisis there is a spectacular economic rebound in the USA, but the euro zone is still in stagnation?

The weakness of the euro zone last year was a major surprise for us. We expected that at least in Germany the rebound would solidify. However, this did not happen. The economic climate in the euro zone is cooled by the legacy of the crisis, which has not been cleared away yet – including excessive indebtedness of some of the societies and high unemployment.

Is the European Central Bank’s easing of monetary policy able to turn the tide for the euro zone?

Easing of monetary policy will certainly not harm the euro zone, but it will not be a cure-all either. Among a number of theoretical mechanisms, through which monetary policy translates into growth rate, only one can really work given the current conditions in Europe: the exchange rate. Even if depreciation of the euro does not provide a strong stimulus to euro zone economies, it will help to get inflation back to the European Central Bank's (ECB) target. With that in mind,the ECB’s recent decisions are justified.

In light of some of the statistics, global trade volume is growing slower than global GDP, while before the crisis it was the opposite. What would explain this?

If international trade developed in-line with its pre-crisis trend in recent years, its volume would be about 20% higher today. This departure from the trends has two reasons. First, the weak economic climate worldwide resulted in reduced demand for imports. Second, the decades before the crisis were, in a way, exceptional. It was a period of very intense economic integration on a regional level - not only in Europe, but also in, for example, Asia. This integration resulted in the lengthening of supply chains and, as a result, a boom in international trade, which was the driving force for GDP growth. Today, the supply chains have stabilized. They are not shrinking but they are not lengthening either.

World Bank forecasts assume that the Polish economy would grow by slightly more than 3% this year, the same as last year. According to some economists, the stabilization of the growth rate on such a level - that is below its potential - is dangerously close to creating a medium development trap. Do we really have no prospects for faster development?

We believe that the Polish economy is doing very well, especially in the context of its strong ties with the German economy. We do see a chance for improvement in the mid-term. We see many positive developments in Poland, for example a rebound in the area of investments, which were growing very slowly for a while. The fact that net exports at the end of last year ceased to be the driving force for growth fits into the scenario of a rebound in domestic demand. Having said that, we do not expect the same investment boom as observed before the crisis, but that situation was not sustainable in the long-term. Now economic growth in Poland is becoming more sustainable. In the long-term, of course Poland is going to face some challenges - including those related to an aging society and emigration.

Despite a decent growth rate, Poland has been struggling with deflation for a while. How should the Monetary Policy Council react to such circumstances?

I would not talk about deflation in the case of Poland. You are not experiencing a general decrease in prices. Fuel and food are getting cheaper but wages and prices of services are growing. This stems largely from external conditions, so the MPC should not worry about it too much - as long as inflation expectations are not decreasing and as long as people do not postpone their purchases by waiting for lower prices. However, baseline inflation at present (not including the changing prices of oil and food – ed.) remains clearly positive. Moreover, employment and wages are growing dynamically and these are not the conditions wherein deflation takes root.