The Polish economy is at a crossroads. In one sign of confidence, capital investment has been stimulated as virtually never before, yet paradoxically emigration has accelerated beyond expectations. Data released at the end of January revealed that GDP expanded by 5.8% during 2006, the fastest in nine years and well above the consensus. This performance belied the political and policy uncertainty that overshadowed the economy for most of the year, as did constant criticism of monetary policy by the cabinet, and fiscal policy by the central bank. Indeed, the criticism continues.

Growth was led by fixed investment, which surged 17% year to year. Given the policy instability, it seems inevitable that investment was motivated by ‘push’ factors, rather than ‘pull’ factors. That is, if the policy environment had been more encouraging, FDI would have grown even faster. In a way, this is a blessing in disguise, because faster investment would have strained capacity, pressing inflation expectations and forcing the hand of the central bank, which in the event has left its benchmark interest rates at 4% since February 2006.

Policy uncertainty has likewise been a blessing for exporters, by contributing to currency weakness. With a more reliable political backdrop, the zloty would be stronger, exporters would be complaining loudly, and the central bank would certainly be criticized also for not reducing interest rates to take some steam out of the currency’s strength.

Retail sales grew strongly, confirming that current spending has contributed to growth. Meanwhile, though surging consumption is a regional trend, Poland’s retail sales growth (12% during 2006) far exceeded its Central European peers. However, investment is still the main story, because Poland also caught the real estate bug which swept along the rest of the continent over the past decade. Construction climbed 18% last year.

Emigration, while unsettling at first glance, is multidimensional from an economic perspective. It is obviously discouraging when a labor market votes with its feet. However, by reducing unemployment and the oversupply of labor, it has eased one burden on the social safety net, which will make it easier for the government to eventually meet the Maastricht fiscal targets, which will in any case be challenging. In addition, if the budget benefits directly from lower-than-otherwise financial support to the unemployed, the economy benefits directly from worker remittances. Meanwhile, emigration is beneficial to the host countries, which have been suffering from shortages of certain types of qualified labor.

Nonetheless, the current situation is unsustainable if it is part of a continual flow, rather than a one-off adjustment process. Emigration, if unchecked, will turn into a brain drain and cause additional political instability, as voters may interpret this as a failure of the political system. Second, initial capital investment is encouraging, but the investments must lead to something, or else the sponsors of this investment will pull out and move somewhere else. Third, Poland does not have the income levels to support a full-fledged housing boom. Finally, although fiscal policy outcomes have been better than some observers have anticipated and although they are worse elsewhere (such as Hungary), eurozone membership may not be attainable on current trends. As a result, the next year or two will be telling if the economy is to start the next decade as well as it is likely to finish the current one.

 Richard Segal

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