Photographer: Martin Leissl/Bloomberg

EU Growth Leader Has to Channel Asian Tigers to Meet Pledges

Updated on
  • Polish economic gains are falling short of government targets
  • Annual GDP expansion rose to 3.3% last quarter, survey shows

Growth that’s torrid by European Union standards won’t cut it for Poland anymore, not with the appetite its new government has shown for squeezing out more revenue to pursue its vision of a new “economic order” based on wealth redistribution.

Only a handful of European countries like Spain or Slovakia were a match for Poland last quarter as it kept up gains of no less than 3 percent into a third year. But the authorities in Warsaw are targeting growth of over 4 percent, more befitting the top economies in Southeast Asia and the likes of which Poland has rarely seen since the 2008 financial crisis. Data due Friday will show gross domestic product rose 3.3 percent in April-June from a year earlier, according to the median of 25 forecasts in a Bloomberg survey.

Social re-engineering is proving costly for a government that swept into power nine months ago on promises to boost welfare spending and champion state-led investment, luring voters left behind by the EU’s fastest growth since the global financial crisis. Only a year after exiting the bloc’s monitoring procedure for budget offenders, Prime Minister Beata Szydlo’s cabinet is again edging closer to the deficit limit of 3 percent of GDP, which threatens the flow of 82.5 billion euros ($92 billion) in funds earmarked for Poland through 2020.

“In order to continue funding generous social subsidies, at some stage the government will need to raise taxes,” said Michal Dybula, the chief economist at BNP Paribas SA in Warsaw. “The slowdown in growth will ultimately weigh on fiscal accounts, though given the consumption-driven pattern over the next several months, we think that problems will resurface only in the second half of 2017 and beyond.”

Handouts, Loans

The government’s sweeping agenda -- from record handouts for families and lowering the retirement age to converting $36 billion of Swiss-franc home loans into zloty -- has already whipsawed investors and exacted a steep political cost, embroiling Poland in a standoff with the EU over democratic values.

The unease has played out in the market, with the zloty lagging behind regional peers like the Hungarian forint and Romania’s leu. Investors have earned 6.3 percent on Polish Eurobonds this year, less than half the average gain for the Bloomberg Dollar Emerging Market Sovereign Bond Index. The nation’s zloty-denominated notes have returned 2.7 percent in 2016, making them the third-worst performer among 26 peers tracked by the European Federation of Financial Analysts Societies. 

Lofty Goals

A lot is riding on how fast the economy regains its footing after growth in the first quarter slipped to 3 percent, the worst since 2013, as investment shrank the most in almost three years. Full-year growth will be 3.4 percent this year and 3.3 percent in 2017, a poll of analysts showed.

The government’s target of 3.8 percent for 2016 is subject to revision after second-quarter data are released, according to the Finance Ministry. The central bank has already cut its forecasts in July to 3.2 percent for 2016 and 3.5 percent the following year, from 3.8 percent for both.

While growth may accelerate through the third and fourth quarters, the government’s full-year target of 3.8 percent may be negatively affected by external risks and “heavily delayed” inflows of EU funding, Deputy Development Minister Jerzy Kwiecinski said on Thursday. In May, Kwiecinski said he stood by his forecast that growth may reach 4 percent this year and 5 percent in 2017. That exceeds all available projections compiled by Bloomberg.

Consumer, Investment

Growth in the EU’s largest eastern economy is benefiting from a pickup in consumer spending, driven by its longest deflation in 60 years, a booming labor market and a pickup in wages. Households received more than 4 billion zloty ($1 billion) in child benefits as part of a program introduced in April. Poles are also counting on another 13 billion zloty the government plans to spend on families with more than one child until the end of the year.

Complementing its efforts to pump money for consumers, the government is seeking to harness 1 trillion zloty, or almost half of the country’s annual economic output, for investment in manufacturing and innovation.

The plan, whose details haven’t yet been announced, is the most far-reaching program yet to rev up capital spending as EU transfers from the EU dwindled earlier in 2016 after adding about one percentage point to Poland’s GDP annually over the past decade.

“Cutbacks in public and quasi-public investment, and an increase in regulatory uncertainty weighing on private investment plans, have been an enduring drag on economic activity this year,” said Ernest Pytlarczyk, chief economist at mBank SA in Warsaw. “In this environment, any rebound in economic growth in the second half of this year will be rather unspectacular.”