World economies

April 23, 2018

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POLAND is classified as a high-income economy by World Bank. Its 38 million consumer market is one of the biggest in Europe. Emerging as a dynamic market over the past 25 years it ranks as the sixth-largest economy in the EU.

In 2016, Poland’s real growth slowed to 2.5 per cent compared to the previous year. The economy expanded 5.1pc year-on-year in the fourth-quarter of 2017 compared to a 4.9pc in the previous period, boosted by fixed investment, government spending and household consumption.

The International Monetary Fund and the World Bank reported 2017 real GDP growth of 3.8pc compared to 2.6pc in 2016. But according the OECD and European Union, Poland’s economy expanded 4.6pc in 2017, well above IMF estimates, and in line with the government forecast, driven by domestic demand and higher economic activity.

Growth momentum is likely to be sustained in 2018. Real GDP growth is forecast to remain strong at 4.2pc in 2018 and 3.6pc in 2019. The growth composition is expected to remain similar to 2017, with domestic demand providing the strongest contribution.

Private consumption is projected to be supported by faster wage growth and record-high consumer confidence. Investment is expected to continue a gradual recovery, driven by a strong rebound of public investment.

Fitch predicts that growth will be driven by strong household expenditure, reflecting wage surges and an economy near full employment. This will boost core inflationary pressure. The ratings agency forecasts inflation to average 2.8pc in 2018 and 3.1pc in 2019.

Labour market bottlenecks and rising unit labour costs would be the main sources of inflation pressure. In 2017, Polish fiscal deficit at 1.7pc of GDP was under control because of the strong economic growth at 4.6pc.

However, the government reduced the retirement age as of October 2017 and tried to introduce new taxes and boost tax compliance to offset the increased costs of social spending programs to relieve upward pressure on the budget deficit.

Fitch expects the fiscal deficit will widen to 2.2pc and 2.5pc in 2018 and 2019, respectively, due to the government’s fiscal expansionary policy. However, public debt ratio will remain broadly stable at 51.8pc of GDP in 2018 and fall to 51.1pc in 2019.

But Moody’s has lowered its estimate of the 2018 budget deficit to 1.8pc of GDP from 2.7pc. In 2019, the budget deficit is to reach 2.3pc of GDP. Inflation is seen reaching 2.7pc by end 2018, rising to 3pc in 2019.

The public debt estimate was also revised down to 51.6pc of GDP in 2018 from 53.5pc. In 2019, debt-to-GDP ratio will further decrease to 50.9pc. But according to some private sector economists, the deficit is likely to widen in coming years.

Despite a successful performance so far a coherent set of policies is needed to respond to current challenges, including managing one of the most rapidly aging societies in Europe, leveraging technological change, and putting people at the centre of government strategy.

According to the World Bank, the Polish economy is expanding rapidly and living standards continue to rise.

To sustain this trend Poland needs address: remaining deficiencies in its road and rail infrastructure, business environment, rigid labour code, commercial court system, government red tape, burdensome tax system, diversification of Poland’s energy mix, the outflow of educated young Poles to EU member states, and persistently low fertility rates.

Indicators of scientific research quality are below those in the leading OECD countries, and business research and development investment remains weak.

South Korea

The economy of South Korea is the fourth-largest in Asia and the eleventh-largest in the world. Having almost no natural resources and always suffering from human overpopulation, South Korea adapted an export-oriented economic strategy to fuel its economy.

In 2014, it became the seventh-largest exporter and seventh-largest importer in the world. South Korea is famous for its spectacular rise from one of the poorest countries in the world to a developed, high-income country in just one generation.

In 2017, after two years of economic stagnation, GDP growth maintained modest expansion on the back of solid exports and improved private spending, a rebound in household consumption, improvement of the real-estate sector and fiscal and monetary stimulus measures.

The successful efforts to increase wages and government spending by the newly-elected President Moon Jae-in brought a surge in consumer confidence which together with an uptick in export growth pushed real GDP growth to more than 3pc.

Despite achieving over 3pc growth for the first time in three years in 2017, there are worries that the economy may be unable to sustain its recovery in 2018 amid the uptrend in interest rates and oil prices.

The finance ministry’s latest outlook suggests 3pc growth for 2018. The Bank of Korea further predicts slower growth of 2.9pc in 2019. Most analysts in the private sector forecast economic growth gradually slowing in the 2-3pc range in 2018 and 2019.

On the fiscal front, however, high household debt and recent government measures to tame rising housing prices could weigh on economic prospects. The 2017 fiscal surplus amounted to 1.4pc of GDP boosted by better-than-expected tax revenues.

The analysts at FocusEconomics expect a 0.8pc fiscal surplus in 2018 and a 0.6pc fiscal surplus in 2019. However, corporate debt represents 110pc of GDP.

The high level of household debt poses a risk to the banking sector. The rebound in international trade and greater fiscal support are projected to sustain output growth at around 3pc through 2019 and 2020.

2018 onwards, the country faces structural problems such as the underdeveloped financial market, population aging, dependence on exports and the decline of the country’s competitiveness as Chinese production moves up-market.

The government needs to address challenges arising from its rapidly aging population, inflexible labour market and heavy reliance on exports. It also suffers from socioeconomic problems such as rising inequality, poverty among the elderly, high youth unemployment, long working hours and low worker productivity.

Corruption is another area that warrants attention as a contributor to inequality. South Korea ranked 51st out of 180 countries.

Published in Dawn, The Business and Finance Weekly, April 23rd, 2018