During the current global economic slow-down, Poland stands out as a European growth champion. With an uninterrupted pace of high growth averaging 4.2% per annum between 1992-2019, Poland is steadily catching up with Western Europe and has become the seventh largest economy in the EU with a total GDP of €524 billion. Considering its population of 38 million, scarred by a turbulent history and post-EU entry emigration bleed, we think that Poland’s remarkable growth engine is not receiving the attention it deserves.
The strength and resilience of the Polish economy can be attributed to its large domestic market, early and deep economic reforms and prudent policies, with consistent EU strategy being the top priority, serving as an important discipline for political and economic integration. A vibrant entrepreneurial landscape of small and medium-sized enterprises (SMEs) benefiting from a large domestic market and strong competitive advantages in neighbouring European countries is also an important source of growth.
Large inflows of immigrants from Ukraine and Commonwealth of Independent States (CIS) countries have supported the labour market, exports’ competitiveness, the real estate market and domestic consumption. Poland’s resilience was proven during the financial crisis of 2008/09 when it was the only EU country to avoid recession. Since 1989, Poland has increased its GDP per capita almost eightfold to $15,431 (€13,558).
Strong domestic consumption
One of the most important features of the Polish economy is its large domestic consumer market, comprising 61% of GDP, exceeding the EU average and, in this respect, being more reminiscent of the US. In fact, household consumption, driven by a strong labour market and wage growth of more than 5%, is expected to continue to be one of the main drivers of the Polish economy in the mid-term. The government’s policy of significant increases in social transfers is fuelling this growth even further. Family 500+, an important government programme introduced in 2016, has added about 2 to 3% to disposable income per year. In 2019, a new wave of social payments was announced, including an extension of the Family 500 +, amounting to 1.7% of GDP and expected to boost consumption by over 3% in 2020. By extending the Family 500+ programme, a family with two children and average net salaries of £864 per earner will see their incomes rise an additional 7% per month.
Moreover, people under the age of 26 will not pay income taxes, pensioners will see rising pensions and the general population will pay lower income taxes by 1%. Importantly, these transfers do not jeopardize the country’s solid fiscal position with the budget deficit at less than 2% of GDP. These policies are clearly positive for consumption and the retail, real estate, leisure, healthcare and education sectors. This year, we see year-to-date (YTD) retail trade growth in Poland averaging 7% with a potential to accelerate further. As investors, what we like even more is the e-commerce part of consumption, growing by 15% between 2008-2018. We see the asset-light e-commerce platforms of the largest internet company in the country, Wirtualna Polska, growing by over 20% in 2018.
In terms of infrastructure investments, Poland has been the biggest beneficiary of EU funds from 2007 to 2013 and 2014 to 2020, with €102 billion and €106 billion of funds received and to be received respectively for each period. We expect Poland to continue receiving net EU funds at a pace of around 0.8% of GDP per year, even beyond 2020.
The construction and real estate sectors are booming, driven by infrastructure projects as well as growing business activities and expansion of global service centres in Poland, with international companies such as IBM, Citi Group, Credit Swiss and Capgemini relocating part of their operations to Poland. Yields in the real estate sector have declined to record a low of 5% and we see increasing sizes of deals for business office skyscrapers reaching €400-600 million with yields at, or even below, 5% which are approaching Western European levels. Several real estate companies listed on the Warsaw Stock Exchange benefit from these opportunities and show increasing, high double-digit, dividend yields and rising rental revenues.
The New Economy
Poland also managed to find robust innovative sources of growth in the ‘New economy.’ One of the fastest growing sectors is video game development. The success of CD Projekt, now a company with a market capitalisation of over €5bn surging almost ten-fold over the last 3 years, triggered an impressive growth in the number of video game developers in the country. Currently, there are over 300 game developing companies operating in Poland and over 20 are listed on the Warsaw Stock Exchange.
Risks to growth
What are the risks to this Polish growth story? The most widely cited sources of economic headwinds include deteriorating demographics, an ageing population and emigration. Nevertheless, since 2014, around 1-1.3 million Ukrainians arrived in Poland to work, and together with the inflow from CIS countries, the number of immigrants has reached 2 million, remarkably the highest immigration inflow in absolute numbers for any EU country. According to estimates from the National Bank of Poland, Ukrainian immigrants have a positive impact of 0.3-0.9% on GDP per year. In terms of external risks, exports to Germany and the EU could be under pressure amid concerns around escalating trade wars and a eurozone slowdown. However, it is important to note that despite its proximity, Poland is less susceptible to a German slow-down than its Central and Eastern European (CEE) peers.
'Golden age' of growth
Currently, Polish equity valuations are at the lowest level in seven years, around ten times price earnings. Together with a solid Earnings Per Share (EPS) growth of 8.7% forecasted between 2018 and 2021, and a potential for improving dividend yield from the current 2.5% to above 4%, the Polish market offers an attractive proposition to investors. While we might be close to the peak of the macro cycle, sharp deceleration of the economy is unlikely due to the strong domestic growth drivers in place. The timing might be right for investors to finally capitalise on what the World Bank, in atypically ornate rhetoric, has termed the Polish “golden age” of growth.
Eglé Fredriksson is Portfolio Advisor at East Capital, advising on the Baltic Strategy and Eastern Europe mandates
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