4 Economic Challenges Facing Poland in 2020

Poland became a high-income nation in a short time compared to other middle-income countries. Between 2009 and 2019, Poland's annual growth rate has averaged a consistent 3.6%, according to the World Bank. This is due to steadily increasing productivity, strengthened institutions, investment in human capital, and successful macroeconomic management.

In 2019, Poland's gross domestic product (GDP) grew by 4.1%, spurred by higher wages and increased domestic consumption. In 2020, however, growth is expected to decline dramatically to 0.4%. The worldwide outbreak of COVID-19 has had a far-reaching impact on Poland's economy as schools, factories, and non-essential businesses closed down amid a temporary border lockdown.

The World Bank predicts a gradual return to growth for Poland, estimating growth recovering to 2.2% in 2021 and 2.9% in 2022. In this article, we review Poland's economy prior to the global pandemic and highlight the main four challenges Poland faces on its road to economic recovery.

Poland at a Glance

Poland contributed to the demise of the Soviet Union in 1989, joined NATO in 1999, and became a member of the European Union (EU) in 2004. It was also the only European country to show economic growth during the 2009 credit crisis.

In 2015, Prime Minister Beata Szydlo’s conservative Eurosceptic Law and Justice Party won a parliamentary majority, but the government has since clashed with the EU over changes in the judiciary and attempts by the EU to impose mandatory migrant quotas.

Poland's Economy

Manufacturing

A strong manufacturing sector has helped Poland to become the EU’s sixth-largest economy. Despite the nation's success with structural reforms including trade liberalization, low corporate taxes, and a business-friendly regulatory environment, the country needs to invest in its core infrastructures such as road and rail.

Poland also needs to address its strict labor code, an ineffective commercial court system that inadequately addresses corruption, bureaucratic red tape, and a tax system that discourages entrepreneurs. 

The Labor Market

In Feb. 2020, inflation increased 4.7% year-over-year, in line with accelerating wages as the labor market tightened further. However, investments in Poland may stall if labor shortages intensify, which they might due to a reduction in immigration, a cut in the statutory retirement age, and the effects on female labor supply from the large child benefit program introduced in 2016. There is increasing protectionism in Poland when it comes to trade. Economists are not sure if this will hurt exports or if they will benefit from stronger-than-projected growth in the eurozone.

Unemployment

Prior to the COVID-19 pandemic, Poland had record-low unemployment, which stimulated wage increases and supported consumption. However, a tightening labor market caused some concern over labor shortages, particularly in sectors such as construction and information technology. The country is also planning to invest in social initiatives, which can stimulate spending but can also stall investment.

The World Bank has identified four areas that represent Poland's biggest economic challenges.

1. An Aging Society

Poland's population is aging more rapidly than that of any other European country. Thirty-five percent of the population will be over 65 by 2030, according to the World Bank. This situation is expected to further tighten the labor force. The demographic shift could significantly strain the healthcare and pension systems. 

2. Leveraging Technology for Growth

Poland is not keeping up with the rapid pace of technological change occurring globally. To be competitive, the country must incorporate technology into its approaches for sustainable and inclusive growth. Both will require more and better investments in innovation and people.

3. Increasing Inequality

Third, as overall income levels continue to mimic those of the European Union (EU), Poland needs to address the risk of increasing economic inequality. Comparing Poland to other regions in the European Union shows that economic inequality in the nation is particularly significant. According to the World Bank, some regions in the nation are among the 20 poorest in the EU.

4. Sustainable Management of Natural Resources

Poland's growth will need resources, and the sustainable management of natural resources, including water and air quality management, is critical for Poland's continued economic stability. The country relies upon coal-based sources for much of its energy needs. Many of the country's citizens cannot afford to replace their antiquated heating and boiler systems, which contribute to ongoing pollution problems.

The Bottom Line

Poland faces challenges from both external and internal factors. Externally, Poland's relationship with Russia, considering that Poland borders both Russia and Ukraine, is uncertain. Additionally, Poland's relationship with the EU and the eurozone's economic future can be a source of strength for Poland or a problem.

However, internally, Poland faces complex governance with a reconstruction agenda that is authoritarian and designed to keep the Polish public content rather than tackle the problems in the political system.