Poland has been the focus of a number of media highlights in recent months, and for the wrong reasons. After nearly two years of conflict over rule of law issues with the EU, the European Commission pressed forward with invoking Article 7, which threatens to strip Poland’s voting rights in the EU and pave the way for further financial disciplinary actions. Regardless of this coverage, economic news coming from Poland seem to underscore the market’s outstanding performance in 2017 and paint an increasingly optimistic picture of 2018, with Bloomberg recently ranking the country as the 4th most attractive emerging market. While FSG shares the overall market optimism, this year will also present a certain set of challenges that will test MNCs’ market strategies.
The economy continues to expand at a high pace
Poland grew by 4.5% YOY in 2017, becoming not only one of the top performers in the Central Europe region, but also in the rest of Europe. It is certainly true that external demand from the Eurozone and Germany, in particular, helped the Polish export sector considerably, and contributed to the high rate of expansion. However, one cannot ignore the significant growth of consumer spending in recent years, which has helped the economy become more diversified and sustainable. Consistent falls in unemployment and continuous growth in real wages have been supported by rapid expansion in industrial production and service sector, thus enhancing the purchasing power of consumers. These dynamics will persist throughout 2018 and 2019, and early data in retail sales (Graph 1) already confirms FSG’s view that consumer spending will be elevated. Additionally, the government has announced that it is expanding on its welfare programs by funneling more money to social protection policies, which will contribute to the overall optimistic sentiment amongst consumers and the retailer sector.
External demand and upbeat consumers have had a positive impact on local businesses as well, as firms rush to satisfy demand. A good indication of this is the expansion in the production of both consumer durable goods and intermediary goods (Graph 2). High industrial production means that business demand for goods and services will remain elevated and present numerous opportunities for B2B MNCs. Finally, customer demand across all segments will be supported by the more dovish stance of the Central Bank, which has refrained from raising interest rates, with some board members voicing their support for a policy rate cut rather than a hike. This will ensure plenty of credit availability for both consumers and business, which will continue to boost market growth.
Political risks have started to subside
Political uncertainty and populist policy-making had seemingly dimmed the otherwise optimistic outlook. The controversial judicial reforms and the ongoing disagreement with the EU over a wide range of issues, including European integration and refugee quotas, have been an additional source of concern amongst some inventors. Recently the government tried to introduce a set of controversial social legislation, which were met by considerable public discontent at home and abroad, raising concerns that the diplomatic standing of Poland has been severely undermined. In fact, the EU itself also fueled these fears by mentioning on numerous occasions that future EU budgets will be tied to the rule of law. This obviously implies that Poland, which benefits the most out of EU funds in absolute terms, will face the long-term prospect of lower levels of investments.
The pace of the economy, however, does not seem to reflect these concerns, and neither does the rate of the zloty, which has appreciated in 2017 and firmed against all major currencies in 2018 (Graph 3). Moreover, in reality, many of the above-mentioned risks have started to subside: while the government does pursue populist and often controversial policies, it has also shown a certain degree of flexibility and has even backtracked. The judicial reforms are a good example of that, given the fact that the ruling PiS introduced a number of amendments, including completely dropping the controversial judge retirement clause in an attempt to mend relations with the EU. Although most of the amendments seem cosmetic, it indicates the government is trying to reach a compromise that balances the interests of their core supporters, the objectives of PiS’s leader Kazcynski, and demands of the EU.
Despite these positive developments, risks and challenges remain, and businesses doing well must avoid becoming complacent. For starters, while political uncertainty is subsiding, the government has also been known for its favoritism for small and local businesses. This can result in a complicated regulatory environment, such as the Sunday Trade ban, which requires large retailers to close their doors every other Sunday and does not apply for local retailers and small businesses. Other changes include lower corporate income tax and higher exemption threshold for small businesses, which will boost employment and business demand, but it will also raise competition. These examples serve to illustrate how failure to account or prepare for such policies can result in business disruptions and difficulties in staying ahead of the competition.
Tightening of the labor market and skill shortages remain another crucial challenge for companies in 2018. In fact, as Graph 4 shows, business have indicated that many job candidates do not have the necessary qualifications or skills to fill a certain position, which will further drive labor costs up. Firms facing such challenges have started employing non-EU citizens, in particular Ukrainian nationals, or have implemented various automation solutions. Additionally, the government’s plan to revise the Special Economic Zones and to boost vocational training may provide multinationals with incentives to invest outside of large metropolitan areas, and to develop closer relationships with education institutions, which will help them overcome skills shortages in the longer term.
Finding ways to address those challenges by adroitly navigating future policies will be key for beating the growing market competition, and increasing the overall profitability of businesses.
For more insights on Polish market in 2018, FSG clients can access the latest Poland Market Spotlight.
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