The Polish economy proved more resilience in the first quarter of 2020, mainly due to a diversified economic structure and low exposure to the sectors most affected by the pandemic. GDP fell by 0.4% compared to the previous quarter, driven by a significant decline in private consumption, while investment fell only moderately, as construction continued to expand and industrial production fell only slightly. According to European Commission data, GDP is expected to collapse in the second quarter and then gradually recover, leaving GDP growth around -4.5% this year and 4.3% in 2021, above the eurozone average (-8%). Despite government measures, private consumption should be affected by the pandemic, as consumers accumulate precautionary savings and keep spending in a scenario of social distancing and high uncertainty. According to Atradius, despite the expected reduction (-4.8%, against a eurozone average of -9.6%), the increase in government payments to households and pensioners, together with tax breaks, continue to support private consumption, which accounts for 58% of GDP, thus reducing vulnerability to external shocks (as already demonstrated by avoiding a recession in the 2009 credit crisis). Along with supply chain outages and falling orders in March and April, low business confidence is likely to impact investment, which is expected to collapse in the second quarter and only partially recover. In addition, demand from Poland’s main trading partners is likely to have a negative impact on exports in 2020, particularly in the transport and tourism sectors. However, here too the expected decline (-4.3%) is much lower than average exports to the eurozone (-11.1%), as economic performance is less dependent on exports than partners such as the Czech Republic, Hungary, or Slovakia.

HICP inflation accelerated significantly at the end of 2019 and earlier this year, driven by a sustained rise in service and food prices. However, the slowdown in wage growth and weak demand caused by the pandemic is expected to end a nearly two-year trend of uninterrupted inflation increases, which is expected to decline in the second half of this year and the start of 2021. As a result, HICP inflation is expected to average 2.7% this year and reach 2.8% in 2021 as economic activity picks up.

The budget is under control despite social measures: the deficit has remained relatively low since 2017, with analysts estimating 1.0% of GDP for last year. Transfers to households will be offset by higher contributions and direct taxes through a favorable labor market and solid growth. An increase in excise duties is planned for this year, while the budget will also benefit from the sale of telecommunications frequencies and CO2 emission certificates. Public debt also remains sustainable even if rising, estimated at 56% of GDP (47% in 2019), subject to some currency risk, and vulnerable to the sentiment of international investors. The current account balance was slightly negative in 2018 and it is estimated that this area will remain in 2019-20. Trade of services continues to show a surplus, supported by transport services abroad, and trade in goods continues to grow despite the global slowdown. The balances of primary and secondary income remain negative: the negative balance of primary income is mainly due to investment income, the secondary balance from the negative balance of the banking sector. Fiscal stimulus measures to support the economy, including credit guarantees, account for 13% of GDP, or €70 billion. Poland will benefit in large part from the Next Generation EU fund, created to help countries recover from recession and further EU subsidies. Monetary policy has so far been accommodative, with the Central Bank lowering its benchmark interest rate three times since March 2016 to an all-time low of 0.1% last July. The budget deficit is then expected to increase by 8.5% in 2020 (from 0.8% in 2019).

Coface emphasizes certain sectors seriously affected by the economic crisis. In the construction sector, operating margins are very tight, with an increase in credit risk mainly for smaller operators. As a result of the recession, companies are increasingly interested in postponing projects and reducing order volumes, with delays and insolvencies in payments expected to increase. As a result of the deterioration in demand from buyers, the machinery, metals, and steel industries are suffering; in turn, the durable consumer goods industry, textile wholesalers, and retailers have been adversely affected by temporary blockades, lower consumer confidence, and rising unemployment. The financial strength of many companies has deteriorated so severely and insolvencies in these sectors are expected to increase.

Despite economic resilience, the prospects for medium-term growth are limited: due to the further tightening of the labor market, the shortage of workers is increasingly becoming a problem, reducing production capacity, especially in the manufacturing sector. The lack of labor could weigh heavily on potential growth, exacerbated by the early retirement of a large proportion of the labor force due to the lowering of the retirement age. In the region, therefore, the Polish economy appears more vulnerable to financial and economic fallout if negotiations between the EU and the UK fail. The annual remittances of Poles living abroad amount to around €7 billion in 2019, most of them from the UK. In the long term, London’s exit from the EU could have an impact on the European Structural Funds, which play an essential role in Warsaw’s economic progress.