Strange times are not necessarily a crisis

“The entire economy is in trouble, not just furniture manufacturers,” Maciej Formanowicz, founder and long-standing president of Fabryka Mebli Forte, told Rzeczpospolita a few days ago in an interview. To justify this pessimistic assessment, he drew attention primarily to the decline in foreign demand, which is occurring at a time of rising manufacturing costs due to higher energy prices and unprecedented increases in the minimum wage. Significantly, he did not use the word “crisis”; he rather spoke of an unstable economy.

This is a very accurate diagnosis of today’s economic reality, where recessionary phenomena coexist with phenomena characteristic of periods of prosperity. The economy (not only ours, by the way) is responding atypically, which puts many entrepreneurs in a new situation. And that which is unknown raises concerns. Under such circumstances, the common voices claiming that Poland is on the verge of some kind of a crisis are understandable. However, what the founder of Forte meant is precisely what can be described, without exaggerating, that the economy is unstable.

Intricacies of the statistics

Let’s start with recessionary phenomena. In the second quarter of this year, real GDP, the broadest measure of activity in the Polish economy, decreased by 2.2% as compared to the first quarter, when — in contrast — it increased by 1.6%. This is data that has been stripped of the influence of seasonal factors that have been subject to a fair amount of revision recently (which as such indicates a breakdown in seasonal patterns, i.e., the economy has just become unstable).

The trend, however, is quite clear: GDP (real, i.e., counting under the assumption of constant prices) is today at around 3% lower than in Q1 2022 when it reached a historic peak. In other words, that is how much less is produced in Poland today. One can argue about the definition, but such a prolonged decline in activity in the economy at least resonates with the term “recession”.

Due to the aforementioned difficulties of the Statistics Poland related with sifting seasonal fluctuations from actual trends, as well as the difficulty in monitoring all prices in the economy at a time of their unprecedented fluctuations, which is needed to make GDP more realistic, this indicator is easy to underestimate today. However, monthly figures for industrial and construction production, retail sales, and exports show us a similar picture.

For example, the volume of industrial production sold today is roughly 5% lower than at the end of Q1 2022. So far, this has mainly been associated with a decline in domestic demand; real retail sales of goods have declined even slightly more during this period.

The new driver of recession, however, is the decline in exports. In Q2, foreign sales of Polish goods and services realistically declined by almost 3%, and the current quarter appears to be even worse. Setting aside the 2020 pandemic, the decline in exports was experienced in late 2008 and early 2009 when the world was struggling with the consequences of the financial crisis. This time, the weakness in foreign demand is all the more worrying as it is likely to persist for an extended period for reasons we do not have enough space to describe here.

Signs of optimism

On the other hand, however – and here we turn to phenomena that testify to the continuing vitality of the Polish economy – what at first glance looks like recession, in the data is often a sign of normalisation in practice. Sold production of industry has been declining in recent quarters, but this has so far only resulted in its return to the (upward) trend from before the pandemic. Retail sales and, more broadly, consumption that includes services, can be looked at in the same way: neither 2021, when we were catching up on spending backlogs from the pandemic period, nor 2022, when Poland’s population surged due to the influx of refugees, were ordinary. This too is normalisation, not a crash. And we are likely to see a rebound in consumer demand soon.

Declining inflation favours the purchasing power of wages, which is and will be further supported by various support from the government, e.g., 13th and 14th pensions, increase in child benefit from PLN 500 to PLN 800, and large increases in the minimum wage. The Safe Credit programme and the almost certainty of interest rate cuts are heating up the temperature in the real estate market, which will support a rebound in demand for consumer durables that has been plunging after the great housing renovation of the pandemic.

The rebound in consumption will also be supported by a sense of job security, as seen in the results of the Households Condition Survey. The unemployment rate is at a record low and its significant increase is hard to imagine. And without increasing unemployment, the thesis of a crisis in the economy cannot be defended. Importantly, this low unemployment is not just a consequence of the demographic situation. Employment in the economy continues to grow and companies that temporarily have too many employees are considering redundancies to be the last resort; rather, they reduce their working hours.

This “stashing” of employment is one indication that entrepreneurs themselves are not setting themselves up for long-term trouble. The best testament to this, however, is that they do not stop investing. In Q2, gross fixed capital formation increased by almost 8% year-on-year, after over 5% in the previous quarter. Yes, this is partly due to public investment, which is stimulated by the need to use EU funds for 2014–2020 by the end of this year. This, however, does not explain everything. It is known that many private companies are investing in machinery and equipment, increasing the degree of automation due to the shortage of workers. This is compounded by investments to increase energy efficiency and foreign investment, which seems to be a testament to the fact that global supply chains are being rebuilt (so-called nearshoring) in the wake of the pandemic and the war in Ukraine. The willingness to invest is undoubtedly encouraged by the fact that corporate profitability remains at an astonishingly high level. That’s true that not all industries are affected, but from a macro perspective, the most important thing is that we do not see widespread trouble. Under such conditions, stronger companies and industries can take over resources (especially labour resources) from weaker ones. This relocation is important to keep the economy dynamic in the long term.