Russia’s invasion of Ukraine has contributed to stagflation trends in the economy. Powerful migration movements have affected demand and the overall labour market. Having found itself in the frontline zone, Poland will nonetheless not suffer any decline in attractiveness as an investment destination.

The years 2021-2022 will go down in history as a major inflation episode, particularly in developed economies. For the first time in two decades, Poland has recorded a double-digit increase in the consumer commodity and service price index. Bringing back normalcy will regrettably not be a painless exercise.

Double-digit price increase

Until recently, salary increases were in step with – or, in some cases, had even exceeded – price growth, sweetening the credit interest rate increase and general cost of living surge for households. Yet companies are suffering ever-greater problems due to cost pressure, delivery issues and general uncertainty. The distinct slump expected in the second half of this year will be accompanied by salary cutbacks. For some households, the struggle with inflation will translate into actual impoverishment.
Until recently, the Polish economy could count on a soft landing. The term “stagflation” made its way into economic discourse for the first time in the autumn of 2021. Considered an exaggeration at the time, it was typically used by those intending to stir up controversy rather than to provide a credible diagnosis of the actual situation. Chief reasons for concern included the red-hot labour market complemented by almost natural unemployment rates and high wage dynamics. Yet inflation was half what it is today and one might have expected the ongoing interest rate increase cycle and slight growth downturn would help to curb it. While resembling stagflation in nature, the process would have been a great deal milder than the one recorded during the oil crisis of the 1970s.
Russia’s aggression against Ukraine changed all these calculations diametrically. Firstly, we have come to realise that the price surge in autumn 2021 was neither temporary nor a thing of chance – it was the outcome of Putin’s intentional game with the West. Secondly, war has brought a sudden surge in uncertainty that companies will have to consider whenever planning investments or appraising long term contracts. The variability index for the Polish zloty has increased, supply chains have been broken and the list goes on. Thirdly, companies for whom raw materials, energy and time constitute significant production input factors have begun accounting for permanently high costs when pricing their own products and services.
How does that translate into inflation indices? While a seemingly abstract issue back in the fall of 2021, double-digit inflation became a reality a few months ago; it would even have been two or three percentage points higher, were it not for the anti-inflation shield. While rather rickety price-related processes are making any forecasting difficult, we have in all probability reached the inflationary peak. I would expect inflation to peak in the summer at around 14-15% and the overall inflation rate for 2022 to average out at 12-13%, with the risk factor most definitely higher than lower. Inflationary pressure should gradually begin dropping in the second half of 2022, though swift inflation rate declines will be impossible – decidedly restrictive monetary policy notwithstanding – given the concurrent heavily expansive fiscal policy. This is why in all likelihood we will not be revisiting single-digit inflation rates this year. Those can be expected no earlier than the first half of 2023, while any expectations about bringing inflation down to target rates ought to be set for no earlier than the second half of 2024.

Consumption-related questions

The impact of the war in Ukraine on growth perspectives for the real economy is considerably more complex than in the case of inflation. At least two conflicting tendencies have to be accounted for. One involves the influx of approximately 2 million refugees, and the related positive demand shock. The other ties in with a decline in Polish household consumption rates as a result of weaker economic performance and a slump in real salary increases.
The joint outcome of these aforesaid shocks largely depends on the funding sources for additional consumption rates triggered by Ukrainian refugees, and on how swiftly they will integrate with the Polish labour market. Purely static calculations would suggest an immediate consumption rate surge by 1-3% – in the short term, this factor will overcome any effects of higher prices and poor sentiment rates in Polish households. This additional consumption can basically be financed from four sources:
  • refugee savings,
  • Polish household savings,
  • public finance sector debt,
  • refugee incomes from employment in Poland.
The first source, which depends on refugees having access to considerable savings they could use to finance the greater share of additional consumption, is highly unlikely. Consumption will be financed domestically, and in all probability will involve a mix of household savings and budgetary funding. Pursuant to this scenario, the decline in current Polish household savings ought to be interpreted as the cost of future consumption. Conversely, given the almost full use of production capacity across Polish economic sectors, public debt-based consumption funding has to be pro-inflationary, and would reduce private consumption rates in the short term while boosting contemporaneous price growth. The permanent consumption surge scenario assumes that refugees will find jobs – as this would improve Poland’s potential GDP. Otherwise, the amplitude of private consumption rate fluctuations will only continue to grow over the coming quarters.

Poland remains attractive to investors

The growth dynamic will be affected by consumption as well as business investments. In this respect, I would be inclined to lean towards cautious optimism. I do not think geopolitical risk will reduce the corporate propensity for investing. I believe investors will continue to view Poland in terms of our NATO and EU membership with both organisations as guarantors of safety and stability. Furthermore, the conflict in Ukraine will in all probability accelerate already recognised processes – alternatives to the Central and East European region are becoming increasingly unattractive given political and institutional instability, now exacerbated by warfare and the exodus of foreign investors from Russia. Last but not least, we might do well to reference a historical analogy: prior to 1989, the German Federal Republic was much more of a frontline country than Poland is today, a factor that had no great impact on the country’s investment attractiveness or development rate.
Obviously, this is not to say that the war will not affect investment perspectives in Poland, yet the overall impact is indirect in nature, involving influence over GDP, inflation and interest rates, the availability of human resources, etc. The Russian-Ukrainian war has affected current sentiments among Polish businesses while contributing to the sense of uncertainty. By accelerating interest rate increases, it has also modified the economic balance of investment projects financed from the state budget. Additionally, the mobilisation-related workforce outflow from Ukraine could give rise to employment-related issues if it only affects specific industries. The other side of the equation involves continuous pressure to truncate supply chains and increase inventory volumes for reasons of general prudence.
The situation is somewhat different when it comes to public investment. This area may experience a slightly negative short-term impact, given the rising costs of construction and other raw materials. Conversely, the medium-term effect will be advantageous thanks to investment expenditures that are mandatory for public institutions. These expenditures may be referred to jointly as “security improvement” investment outlays. ©℗
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