Warsaw, 15^th December 2021

 

Memorandum of the Union of Entrepreneurs and Employers on inflation

 

Inflation crisis

The economies of Poland and the European Union are going through hard times. Since the beginning of March 2020, the world has been struggling with a pandemic, and in spite of a pronounced recovery in 2021, the new COVID-19 variants keep the global economy from healing completely. To boot, the pandemic is one of the sources of yet another problem that we have fallen victims to in recent months: soaring inflation. According to Eurostat data, inflation in the European Union amounted in October 2021 to 4.4% year-on-year, and to 4.1% (HICP) in the euro area. It was lowest in Malta (1.4%), Portugal (1.8%) and Greece (2.8%), and highest in Lithuania (8.2%), Estonia (6.8%) and Hungary (6.6%). Poland too recorded one of the highest inflation rates (6.4%), thus taking 5^th place in the entire EU[1]. Eurostat also analysed inflation in the euro area in November 2021, and as it turns out, it increased to 4.9% year-on-year[2]. Data Statistics Poland are not optimistic either. From the beginning of 2021, inflation has been growing steadily, reaching the level of 2.6% year-on-year in January, 4.3% in April, 5% in July, 5.9% in September, and 6.8% in October[3]. To make matters worse, according to their data, in November inflation might have amounted to 7.7% [4][4]!

[chart]

Source: Statistics Poland, https://stat.gov.pl/wykres/1.html

Reasons behind growing inflation in Poland and in Europe

A number of factors contribute to such a significant increase in inflation in Europe. One of them is the economic recovery of 2021 following a year of restrictions and lockdowns back in 2020. The fact that in the Q3 2021, according to a preliminary estimate of the Statistics Poland, the Polish GDP went up by 5.1%[5] proves this assumption, and so does the fact that the average wage in the enterprise sector in October 2021 increased by nearly PLN 500 since October 2020[6]. Consumption is largely responsible for the increase in GDP, which in Q2 2021 increased by as much as 13.3% year-on-year[7]. These data are certainly good news for the economy, but in terms of inflation, they are hardly neutral. Especially in the case of the Polish economy, which based its model of recovery from the pandemic crisis on generating consumer demand instead of stimulating investments, the impact of the above-mentioned factors on the increase in inflation, one of the highest in Europe, is the more visible.

One of the key reasons for inflation in the European Union is without any doubt the increase in energy prices related to rising gas prices. Demand for gas has been steadily increasing in recent months as a result of the economic rebound. Consequently, the prices of this raw material on global markets have gone up. Political uncertainty in the context of European-Russian relations (the latter being one of the largest natural gas suppliers to the European Union and its member states, including Poland) further aggravates the situation. Moreover, the CO₂ emission allowance within the EU ETS trading system comes to minds as well, as it has become the object of interest of speculators who purchase allowances with the intent to resell. For example, on the ICE and EEX exchanges, the prices of allowances increased by approximately 200% from the level of EUR 25 per tonne of CO₂ in November 2020 to almost EUR 75 a year later.

Another key factor influencing inflation is the increase in fuel prices – not only because fuels are part of the so-called inflation basket, but also (as is the case of energy prices) the increase in fuel prices translates into higher prices of virtually all goods and services in the economy. One ought to look for reasons for the increase in fuel prices (same goes for natural gas) in growing demand for this raw material, which in turn means higher prices on markets around the world. At the end of 2020, the price of a barrel of brent crude oil amounted approximately USD 50, whereas in November 2021 to USD 85. In recent days, we can observe a drop in oil prices to USD 69-73 per barrel due to uncertainty sparked by the emergence of a new variant of the coronavirus: “Omikron”. Besides, the weakening Polish zloty has an impact on the growing fuel prices too. On this very day, the US dollar costs PLN 4.10[8], while a year ago it cost PLN 3.69[9], which means that today one must pay over 10% more for the same amount of oil on international markets.

Of course, the policy pursued by Polish authorities is not without significance for inflation. Numerous social programmes, costs related to aid programmes aimed at mitigating the effects of the COVID-19 pandemic, or the re-purchase of Treasury bonds have all led to a surplus money supply on the market. Poland also decided relatively late (compared to other countries)to tighten its monetary policy and raise interest rates. According to the National Bank of Poland, inflation was supposed to be temporary. This approach has rather changed over the last three months. At the moment, the President of the Polish central bank is of the opinion that inflation may stay with us for a longer time, and the Monetary Policy Council is systematically raising rates. One can expect this trend to continue next year.

And finally, one must speak up that a further increase in inflation in Poland will be driven by the “Polish New Deal”. As part of this package, the real public burden on entrepreneurs will increase considerably. Ergo, the increase in the costs of economic activity will inevitably lead to an increase in the prices of goods and services, which will do nothing but increase inflation in 2022.

The risk of stagflation

Increasingly often, the media warn about the possibility of stagflation. Under normal market conditions, GDP growth is usually followed by an increase in inflation, and when GDP falls or its growth decelerates, inflation decreases. However, in the case of stagflation, economic stagnation is accompanies by high inflation. As we have indicated above, in Q3 of 2021, in line with the preliminary estimates of Statistics Poland, GDP increased by 5.1%. Still, one must not forget that this was primarily fuelled by consumption, not by investing in the economy. What this means is that our economy is not becoming more effective or competitive and may therefore lag behind other European countries and the world in general in the long run. High energy prices, problems related to supply chains, rising prices of raw materials and a number of other factors mentioned above translate not only into soaring inflation, but also into an industrial slowdown, already elaborated on in the Markit PMI Purchasing Managers’ Index. In recent months, the index, albeit still favourable for Poland, was disappointing (53.4 points in September, 53.8 points in October and 54.4 points in November, respectively)[10]. Economists also predict a decline in GDP, and the latest estimates say that the GDP will increase in 2022 in the range of 4-5%[11].

While the risk of stagflation is still moderate, the very risk of its occurrence makes the need to combat rising inflation all the more urgent.

Europe in the face of inflation

In November 2021, inflation in Germany increased by 5.2% year-on-year – the highest surge in 29 years, since 1992. One of the main reasons for this was the significant rise in energy prices, which increased by over 22%. In this case, fuel is also included in the energy price growth index. Prices of food (4.5%) and services (2.8%) were also higher[12]. Nevertheless, these are not the only factors related to skyrocketing inflation. Just as in Poland, a number of measures were undertaken in Germany to counteract the COVID-19 pandemic, among them a temporary reduction in VAT. When it returned to its original value, increases in the prices of goods and services became an additional factor leading to higher inflation.

France boasts a relatively low inflation. In November 2021, it amounted to 2.8% year-on-year. Notwithstanding its relatively low level, authorities decided, amongst other, that a large part of the society be awarded vouchers EUR 100 worth to compensate for the effects of fuel price increases. One should keep in mind, however, that both France and Germany are part of the so-called Eurozone, and therefore their fiscal policy depends on the actions of the European Central Bank.

A similar level of inflation to that of Poland was observed in Hungary (6.6% in October). Budapest made up its mind to slightly increase the country’s base rate, to 1.8% in October and 2.1% in November. The last one was the sixth increase in interest rates in recent months, and their value is 0.35% higher than in Poland.

The problem of inflation affects the entire European Union to a greater or lesser extent. For instance, in France, where inflation is not too high, measures undertaken are rather insignificant, in the form of one-off social transfers. In the case of Germany, inflation is above the EU average and has reached levels unseen in years. And yet it is still much lower than in Poland. The situation most similar to our country can be observed in Hungary. However, lest we forget, the fiscal policy of this country is a bit more determined than in Poland.

Anti-inflation shield

The fiscal policy pursued by the National Bank of Poland and the Monetary Policy Council is not the only measure to combat inflation. On 25^th November 2021, the government decided to introduce an “Anti-Inflation Shield”. This programme assumes a number of changes aimed at curbing inflation. Draft projects have already been submitted to the Sejm (the lower house of the Polish parliament).

The first step to be implemented as part of this “Shield” is a reduction in excise duty on fuels to the minimum level permitted in the European Union, which is to apply from 20^th December 2021 to the end of May 2022. Then the “tax on emissions” is to be abolished. According to the government’s assumptions, this reduction will result in a drop in fuel prices by approximately PLN 0.2-0.3 per litre. Also noteworthy is the fact that there have been declines in oil prices in recent days worldwide in the light of the emergence of “Omicron”. Should this trend continue, lowering wholesale oil prices may contribute to a dip in fuel prices. Reductions in taxes and wholesale prices of raw materials may translate into a noticeable drop in prices at petrol stations.

The “Shield” also postulates a reduction of VAT on natural gas from 23% to 8% from January until the end of March 2022 and 0% excise tax for households. In this period, VAT will also be reduced from 23% to 5% on electricity and households will be exempt from excise duty on electricity. January to March 2022, VAT on heat energy for households is also to change from 23% to 8%. However, let us not forget that next year we will face further, already approved increases in electricity and gas prices, which will fully “absorb” the above-mentioned tax cuts. Furthermore, these reductions are only temporary, while the increases to come will stay with us for good.

Another element of the “Shield” to be introduced are further social transfers in the form of “shield allowances”, which, depending on the number of people in the family and the income earned, is to range from PLN 400 to PLN 1,150. According to estimates, up to 7 million households will be eligible for these allowances.

In the opinion of the Union of Entrepreneurs and Employers, the “Anti-Inflation Shield” may in the short term slow down inflation, but will fail to stop it. Tax cuts are only of a temporary nature, therefore, when they are gone, we may deal with yet another sharp increase in inflation. The VAT cut in Germany had a similar effect. Another thing is the further development of the system of social transfers in the form of a “shield allowance”, which will further boost consumption and thus fuel inflation. While our Union supports tax cuts, we believe that such measures should be more systemic, long-term, and in line with national fiscal policy. The government announced that it would allow some solutions of the “Anti-Inflation Shield” to be extended, and for other solutions to be introduced as well. Should this come to fruition, these measures may help us mitigate the effects of the inflation crisis. At the same time, we must point out that additional social transfers are not the answer to our problems. They will only contribute to exacerbating the situation in Poland. Above all else, it is necessary to change the approach to the economy itself and create conditions for entrepreneurs to develop, to be more effective, innovative and, consequently, more competitive.

***

[1] Flash estimate – October 2021, Euro area annual inflation up to 4.1%, https://ec.europa.eu/eurostat/documents/2995521/11563351/2-29102021-AP-EN.pdf/70e9c60b-8bca-12cc-859e-41af561b5a08 (date of access 15^th December 2021)

[2] https://ec.europa.eu/eurostat/documents/2995521/11563387/2-30112021-AP-EN.pdf/8072b1c7-4379-7fbe-af36-ec2300c42265 (date of access 15^th December 2021)

[3] Statistics Poland (Główny Urząd Statystyczny), https://stat.gov.pl/wykres/1.html (date of access 15^th December 2021)

[4] Statistics Poland (Główny Urząd Statystyczny), https://stat.gov.pl/obszary-tematyczne/ceny-handel/wskazniki-cen/szybki-szacunek-wskaznika-cen-towarow-i-uslug-konsumpcyjnych-w-listopadzie-2021-roku,8,67.html (date of access 15^th December 2021)

[5] https://stat.gov.pl/obszary-tematyczne/rachunki-narodowe/kwartalne-rachunki-narodowe/szybki-szacunek-produktu-krajowego-brutto-za-iii-kwartal-2021-roku,1,35.html (date of access 15^th December 2021)

[6] https://stat.gov.pl/sygnalne/komunikaty-i-obwieszczenia/18,2021,kategoria.html (date of access 15^th December 2021)

[7] https://www.money.pl/gospodarka/polskiej-gospodarce-mogla-wyrosnac-nowa-kula-u-nogi-do-tej-pory-byl-to-nasz-atut-6702642264578912a.html (date of access 15^th December 2021)

[8] https://www.nbp.pl/Kursy/KursyA.html (date of access 15^th December 2021)

[9] https://www.nbp.pl/home.aspx?navid=archa&c=/ascx/tabarch.ascx&n=a239z201208 (date of access 15^th December 2021)

[10] https://businessinsider.com.pl/stagflacja-w-polsce-jest-mozliwa-boja-sie-ekonomisci-wszystko-przez-kryzys/7869s03; https://300gospodarka.pl/news/pmi-indeks-markit-przemysl-sierpien-2021; https://www.money.pl/gospodarka/pmi-nowy-raport-o-polskim-przemysle-coraz-mocniej-ciaza-opoznienia-w-dostawach-6678454486424384a.html (date of access 15^th December 2021)

[11] https://businessinsider.com.pl/gospodarka/makroekonomia/pkb-w-2022-r-ekonomisci-obnizaja-prognozy/654mxb2 (date of access 15^th December 2021)

[12] https://businessinsider.com.pl/gospodarka/inflacja-w-niemczech-padl-29-letni-rekord-do-polski-im-jednak-jeszcze-daleko/neszq2y (date of access 15^th December 2021)

 

See more: 15.12.2021 Memorandum of the Union of Entrepreneurs and Employers on inflation

Warsaw, 7^th December 2021

 

Updated 2022 Economic Forecast of the Union of Entrepreneurs and Employers

 

2021 was a year of economic rebound after the crisis caused by the COVID-19 epidemic a year before. Economy’s return to a state of ‘relative normal’ after a period of lockdowns and restrictions does not mean, however, that the risk related to the pandemic have disappeared from the landscape entirely.

The emergence of new variants of the coronavirus raises concern both on the part of governments and companies, while a specific “decline” after the period of expansionary fiscal and monetary policy in 2020 manifested itself in the inflation that has been skyrocketing in most developed economies.

It was this economic index that made most forecasts published in the H1 of 2021 (including our own) obsolete. Research centres failed to take into account the possibility of such a rapid increase in prices almost all over the entire developed world.

Keeping these circumstances in mind, we present an updated 2022 Economic Forecast. The current projection is as follows:

Unemployment

Formerly: 5.9%
Now: 5.3%

Inflation

Formerly: 3.1%
Now: 6.5%

GDP growth

Formerly: 5.1%
Now: 5.2%

Investments (% GDP)

Formerly: 17.2%
Now: 16.9%

 

Find out more: 07.12.2021 Updated 2022 Economic Forecast of the Union of Entrepreneurs and Employers

Warsaw, 14^th December 2021

 

Opinion of the Chief Economist of the Union of Entrepreneurs and Employers
on the economic benefits of transformation and accession to the EU

 

Systemic transformation of our region began in a formal sense over three decades ago. Apart from the Polish general elections on 4^th June or the wave of protests in the countries of the so-called people’s democracy, one of its most momentous events, was the fall of the Berlin Wall. It marked the beginning of the process of German reunification (following the German unification of the 19^th century), which ended in October 1990. Thirty years ago, in 1991, the Soviet Union collapsed, although this did not mean the collapse of the Soviet, and later Russian sphere of influence.

From the Polish perspective, systemic transformation opened a window of opportunity. For the first time in two centuries, all Polish lands and the Polish nation were outside the Russian / Soviet sphere of influence. While the incorporation of East Germany into the West in 1989 was self-explanatory, or the historical and cultural closeness of Czechoslovakia, Slovenia and Hungary to Germany and Austria opened the door to the West for them relatively wide, the fate of Poland (along with Romania, Bulgaria, Latvia and several other countries) was not sure back in 1989. In the case of Poland, the efforts of the Americans were critical, as they translated in economic terms into direct involvement of experts, led by Jeffrey Sachs, in the process of economic transformation. However, this does not in any way diminish the role of domestic authorities. They led Poland onto a path of integration with the West and dynamic and thorough socio-economic changes, which resulted in the emergence of a modern market economy on the ruins of an inefficient planned economy. And they achieved it in a way that allowed for preservation of many of our resources, human capital more than anything else, developed in the times of real socialism.

In the years and decades to follow, Poland’s ties with Western Europe (first with the European Economic Community and later the European Union) became increasingly essential. These countries (including Germany, the Netherlands and Austria) played a progressively vital role in Poland’s trade. Independently and as a European Community alike, they became the main donors of development aid, which accelerated the Polish reforms. From today’s perspective, the scale of this aid in the 1990s (the equivalent of EUR 3-4 billion) was minor, one must, however, keep in mind that back then Poland’s GDP was several times lower than it is today.

The accession of Poland and several other countries in CEE constituted in 2004 a symbolic end to the first phase of transformation. It encouraged further integration and rapid development. One can look at it from a number of angles. Becoming part of EU institutions brought about stabilisation and order to the regulatory and institutional framework. It was then that the post-communist era began to end in Poland. The inflow of EU funds, the spending of which was subject to increasingly stringent requirements, the transposition of European law, and finally political and clerical contacts at various levels radically changed the model of the functioning of the public sphere in Poland. Some of these changes were taking place under the influence of external pressure and could be objected to, but they undoubtedly civilised Polish politics, especially the meeting point of politics, the state and the private sector. Subsequent reports from Transparency International proved this to be right: the level of corruption in Poland and other countries in the region began to decline, among others, in the eyes of foreign investors and politicians. This impression was true for the entire region; therefore, it is difficult to name specific internal factor that would impact this process.

Furthermore, over the first years after Poland’s accession to the EU, the last such great migration in Polish history took place (at least in a foreseeable time perspective). Although it was inevitable on an open labour market and it solved several internal problems in the short term (it improved budget stability thanks to a decrease in social benefits, lowered unemployment and eased political tensions), it contributed in the long term to the considerable demographic challenges that Poland is facing nowadays. It also shed light on the short-sightedness of the political elites of that time (regardless of political affiliation). Politicians did not even try to put any tools to use in order to mitigate this enormous outflow of human capital from Poland – neither during accession negotiations, nor after 2004. Perhaps it was simply impossible? Nonetheless, we must not forget that the inflow of funds sent by migrants back to their families in Poland did in a way offset the costs of the human capital outflow. According to some estimates, this stream of money amounted to more than 2% GDP by 2010, and in the next decade remained at the level of over 1% GDP (after the accession, it remained in the range of EUR 3-5 billion annually).

The accession also resulted in unprecedented infrastructural aid that Poland and countries of the region benefited from. New investments reached a scale unseen in decades, and one could compare EU-funded development programmes to the Marshall Plan. The inflow of funds incomparably greater than in the pre-accession period made it possible to expand infrastructure, in particular in the easternmost regions. One might question some of the investments, or complain about execution or disappointing effects of other, but there can be no doubt that EU funds were behind the great shift that took place in Poland over the last dozen or so years. Moreover, this change at least in part supported the development of Poland, as domestic companies were employed as contractors and subcontractors, pro-development infrastructure grew, and there were funds for research and development projects.

However, it is probably Poland’s participation in the European open market that brought the greatest profits. Investment capital from abroad flooded the market, followed by technologies and organisational changes that went far beyond what happened in the last decade of the 20^th century. It gave Polish companies easy access to the European market, which brought many benefits, especially in the field of services (such as Polish road transport services – a highly interesting case indeed). A process of spectacular re-industrialisation of Poland was put into motion although, unfortunately, to this day most Polish companies tend to be mid-level subcontractors in production chains. Of course, one could argue there are costs associated with participation in the European market: the collapse of uncompetitive companies or changes in the ownership structure. A more serious challenge are the efforts of some Western countries to restrict the freedom of exchange, in particular in services, thus limiting Polish entrepreneurs’ competitive advantages – the foundation of their success in European services.

There can be no doubt that the accession to the EU accelerated the economic development of Poland and the entire region in a significant way. It extended the period of rapid convergence to the economies of the West that had lasted since 1989. As a result, the level of GDP per capita (in purchasing power parity) in Poland reached the level of GDP in Portugal (and the level of GDP per capita in the Czech Republic reached last year the level of Italy). For the first time since the end of World War II, the development of the Polish state has come close to that of the countries of the European South and never have we been so close before.

The above comments primarily concern economic issues. Political ties with the West, stronger than have been in centuries (even despite recent turbulences), are testament to the success of transformation. Nevertheless, it remains to be seen whether we wasted the period of peace, rejoicing at economic success, part of which was pure luck. The contributions of the architects of economic transformation are undoubtedly enormous. Later, however, we capitalised on economic integration with the West, competitive advantages, and the influx of huge post-accession funds. The open question we ought to ask ourselves is: what will drive further development in the nearest future?

 

Piotr Koryś, Ph.D.
Chief Economist of the Union of Entrepreneurs and Employers

 

See more: 14.12.2021 Opinion of the Chief Economist of the Union of Entrepreneurs and Employers on the economic benefits of transformation and accession to the EU