The uncertain situation in Ukraine and trade sanctions imposed by Russia have so far had little impact on the Polish economy, though some exporters oriented toward Poland’s neighbors to the east have suffered tangible losses. As it turns out, the Polish economy may suffer more as a result of a slowdown in the eurozone. This is confirmed by the latest data from Eurostat, the EU statistics office. The data shows that industrial production in the eurozone fell by 1.8 percent in August in month-on-month terms, while in July it declined by 0.9 percent. In year-on-year terms, the index dropped by 1.9 percent after a 1.6-percent increase in July.
Industrial production in Poland increased by only 0.3 percent in year-on-year terms. Eurostat forecasts for Poland suggest that Poland’s GDP growth will be around 3 percent at the end of 2014, less than projected by the Polish government. According to the Polish Finance Ministry, the country’s economic growth in 2014 will reach 3.3 percent, twice as much as a year earlier.
The decline in industrial production in the eurozone is the result of factors including the reluctance of European companies to invest in the real economy. Interestingly, this is happening at a time when interest on investment loans is at a record low. The situation in Europe could have a negative impact on the Polish economy, especially as the European Union as a whole is Poland’s key economic and trading partner.
In an attempt to stimulate the economy, the Monetary Policy Council (RPP) in October decided to cut the key interest rate by 0.5 percentage points to an all-time low of 2 percent. The main justification for this relatively strong monetary easing measure was data pointing to a slowdown in economic activity. Also significant is an increased risk of inflation remaining at a very low level, with deflation recorded in July.
It is unclear if cheaper loans will encourage Polish businesses to invest. A lot depends on whether the clear downturn in the eurozone, in particular a strong decrease in activity in German industry, proves to be only temporary or whether it persists longer. Another important question is whether domestic demand will continue to grow. Recently domestic demand has become a key driver of Poland’s GDP growth.