Can Poland overtake Germany?

Last August, a report by the Warsaw School of Economics (SGH) argued that if Poland maintains the economic growth rate it enjoyed in 1990-2018, it will catch up with Germany in 21 years' time. Poland’s fast, stable growth rate has enabled it to close some of the gap between itself and Western Europe.
Can Poland overtake Germany?

Warsaw, Poland (Photo, CC BY-ND 2.0)

It will take Poland just 14 years to catch up with the average GDP-per-capita rate of the 15 „old” EU member states, the report also showed. Hanna Godlewska-Majkowska, a professor at SGH, wrote in the report that in terms of GDP per capita, Poland caught up with Greece in 2015 and is set to overtake Portugal by the end of this year.

In the first five months of 2019, Poland surpassed the UK and became the sixth biggest economic partner of Germany in the world, the Polish Economic Institute (PIE) said in a report. In 2018, Poland’s exports to Germany constituted 28.2 per cent of all Polish exports, while imports stood at 22.4 per cent. The surplus in turnover totaled EUR13.7bn in 2018. But, according to the report, Polish exports are less dependent on the German economy than previous statistics show.

Facts and figures

Poland’s fast, stable growth rate has enabled it to close some of the gap between itself and Western Europe. Between 2016 and 2018, GDP growth accelerated to 4.3 per cent, employment jumped by 2.5 per cent and unemployment fell to a record low of 3.9 per cent. Inflation remains below 2.5 per cent. The country’s fiscal deficit declined to 0.4 per cent in 2018 from 2.7 per cent of GDP in 2015, and public debt dropped to 48.9 per cent from 51.3 per cent.

In 2015, the average hourly labor cost (excluding agriculture and public administration) was EUR25 in the EU, but just EUR8.60 in Poland, placing it in the bottom six of the EU28 countries, according to Emilia Skrok, a senior economist at the World Bank. “And the convergence with wages in Germany — its immediate neighbor to the west and an important destination for its workers — is occurring only slowly; productivity growth and real wages tracked each other significantly more in Germany than in Poland.” Between 2000 and 2016, Polish labor productivity grew by about 51 per cent, but compensation for workers grew only 33 per cent.

Fifteen years ago, Poland joined the EU and at the time Poland was one of the least affluent countries in the group: GDP per capita was USD16,000 in purchasing power parity, the second lowest after Latvia. Unemployment exceeded 19 per cent. The average monthly salary was less than PLN2,300 (EUR510).

Over the last decade and a half, the country has grown around 4 per cent a year on average, more than three times the EU average of 1.2 per cent. Only Lithuania and Romania have done better in terms of per capita GDP growth in purchasing power parity. Poland is also the only EU country to have experienced growth every year since joining. In fact, Poland’s record of uninterrupted economic growth stretches even further back, to 1992.

Between 2004 and 2018 it managed to almost halve the distance between itself and the old EU countries in terms of GDP. Thus, Polish GDP was 44 per cent of the EU average in 2004, compared to 67 per cent in 2018. Today only two countries — Ireland and Luxembourg — are twice as wealthy as Poland, compared to 13 countries when it joined the EU 15 years ago.

A McKinsey report says that while celebrating Poland’s achievements, it is worth remembering that the country is still only 22nd among the 28 EU member states in terms of GDP per capita in purchasing power parity (Poland: USD28,000 vs. EU average: USD38,000).

Poland has made big progress on productivity, McKinsey notes. In the 15 years since it joined the EU, the added value of the Polish economy in purchasing power parity has grown 5 per cent a year on average, compared to just 2 per cent in the EU-15.29 Productivity measured as added value per working hour grew four percent year-on-year, from EUR13/hour in 2004 to EUR21/hour in 2018.

But despite this progress, productivity is still not on a par with Western Europe (EU-15), where it averages EUR40/hour. If Poland raised its productivity to the level of Western Europe (EU-15), its economy could be twice as large, the report said.

“With unchanged policies we have a few year of convergence ahead; the EU average in 2033 sounds plausible, but still we will remain a rather poorer country by EU standards,” Aleksander Laszek, chief economist at the Civil Development Forum, a think tank founded by Leszek Balcerowicz, a former Polish deputy prime minister and finance minister, and a former governor of the Central Bank of Poland, said. “Mr. Morawiecki’s [Poland’s Prime Minister] polices caused a fall in private investment, while the lowering retirement age makes the impact of aging on economy even bigger and the attack on rule of law is taking its toll on small and medium companies.”

“In reality, Poland’s boom is the result of positive external shocks. And if the ruling party doesn’t push through serious reforms, the next downturn could seriously damage the country’s future,” Mr. Laszek wrote in Politico. “Poland’s fast GDP growth, for example, was due to the cyclical upswing in other EU countries, which peaked in 2017,” Mr. Laszek noted. “As the continent experiences a serious slowdown, Poland won’t be immune to its effects. And barring another significant influx of workers from Ukraine, which is unlikely, the most optimistic projections for Poland’s employment figures is stagnation.”

The PIE said that Poland has already received or will soon receive EU funding of EUR164bn, which corresponds to nearly twice the country’s annual budget. “For us it was in a way like the Marshall Plan and these funds have helped in the implementation of most public infrastructure investments carried out since 2004, including the construction of highways, expressways or sewage treatment plants. When we evaluate our membership in the EU, we shouldn’t forget about the harmonization of laws, the streamlining of financial flows or the elimination of numerous trade barriers,” points out Piotr Arak, the director of the Polish Economic Institute.

“Four main external forces have driven the remarkable successes,” The Economist noted recently. „The first is access to generous subsidies from the EU, second the flow of remittances from millions of expats who live and work in the EU, a benevolent recent economic environment, especially the success of the German economy, and lastly, the four all started from a low base, enabling them to serve as cheap workshops for more developed economies.”

Mr. Arak notes that the convergence of economic and political forces in 2014-15 was key. “The ruling party’s attempts to nationalize the financial sector are not unique in western Europe also,” Mr. Arak notes. “And sometimes the Germans also protect their own markets. It’s normal. Poland still has too little private capital of its own, so the state has to do some of the heavy lifting.” Mr. Arak points to some sectors where Poland may become European leaders, in particular window production, cosmetics, pharmaceutics.”

“Without major policy changes catching up with EU average will be hard, but with some luck it might be possible,” Mr. Laszek says. “Catching up with Germany, however, will not be possible. Our economy still has momentum and is growing pretty well, but in Q4’20 the slowdown in data started to be more visible. The delay with which the recent slowdown in the European economy reached Poland created the misleading impression that we can growth fast despite slowdown of our main trading partners, but now the reality starts to bite.”

“If the German economy slows down in the coming years, this will impact Poland perhaps more than most other EU economies. Indeed, there is a certain contradiction here. Data for Q4 indicate that in the end the slowdown has reached us,” he added.

The future

Analysis by McKinsey suggests two potential paths of economic development. In the first scenario — the baseline scenario — Poland develops at around 3 per cent a year, the natural continuation of a long-term slowdown in growth based primarily on demographic and productivity forecasts. In this scenario, real GDP grows by EUR200bn by 2030 and per capita GDP to EUR18,500 (compared to EUR12,400 today) — higher than Portugal’s current per capita GDP.

However, a number of risk factors could affect Poland’s economic development, preventing it from realizing even this baseline scenario. In the second, aspirational scenario, Poland grows at 5 per cent a year in the period to 2030. This assumes that the difference between Poland and Western Europe in terms of participation in the labor market and productivity is halved (in other words, participation in the labor market reaches 70 per cent and productivity rises by more than 20 per cent) and the share of investments in GDP reaches 22.5 per cent, which is halfway between the level of the EU and the Visegrad Group, excluding Poland. If this happens, the Polish economy could potentially double in size, growing from EUR477bn in 2018 to EUR890bn in 2030 at constant prices. That would mean per capita GDP of EUR24,300, on a par with Spain today. But, according to McKinsey, risks to both scenarios include a large drop in the number of people of working age, EU funding being phased out faster than expected, a slump in foreign investment and a slowing down of productivity growth due to failure to improve the education system or poor cooperation between business and universities.

Warsaw, Poland (Photo, CC BY-ND 2.0)

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