Country Report 2019 PolandJoost Korte, DG EMPL

Marc Lemaître, DG REGIO

Benjamin Angel, DG ECFIN

Warsaw, 7 March 2019

2019 European Semester

Joost Korte, DG EMPL

Current economic trends in Europe

3

Real GDP and employment growth in the EU

2019 European Semester

• Country reports published on 27 February

• Analytical parts consulted with the Polish authorities before publication

• Stronger link with the Multiannual Financial Framework

• Focus on investment needs

4

Stability and Growth Pact

Macroeco

nom

ic I

mb

ala

nces P

roced

ure

5

6

# Country-specific recommendation Evaluation

1 Ensuring fiscal framework compliance, improving efficiency of public spending.

Limited progress

2 Increasing labour market participation and removing obstacles to more permanent types of employment.

Ensuring sustainability and adequacy of the pension system.

No progress

3 Strengthening the innovative capacity of the economy.

Ensuring effective public consultations in the legislative process.

Limited progress

Poland has made limited progress in addressing the 2018 CSRs

Economic outlook, investment and sectoral policies

Benjamin Angel, DG ECFIN

• Poland’s long-run economic prospects depend on economy’s capacity to move towards knowledge-based economy producing advanced products and services

• Increasing investment to support innovation, education and skills development, better infrastructure and cleaner energy are crucial for long-run success

8

Key challenge and investment needs

Poland is enjoying good economic times

• Uninterrupted fast growth over the last decade; growth to remain solid in the short term

• Household consumption and gradually increasing investment (mainly public) are main drivers

• Best labour market situation in 30 years

• No short-term risks to fiscal sustainability

9

Cumulative GDP growth, 2017-2018E

1

3

5

7

9

11

13

15

IEM

TR

O PL SI

LV

HU

EE

CY

LT

SK

CZ

BG

HR

ES

NL

AT FI

PT

LU

EU

SE

FR

DE

EL

UK

BE

DK IT

%

Long-term prospects call for structural reforms

• Favourable economic environment offers unique opportunity to address structural challenges:

• Decline in working-age population

• Skill shortages & innovative capacity of the economy

• Investment climate: quality of institutions, policies and regulatory environment

10

Estimated composition of potential growth

-1

0

1

2

3

4

5

08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23

TFP Capital Labour

pp forecast

Role of investment

• Overall, investment has been weak since 2016

• In GDP-ratio terms, in 2009 – 2015 Poland used to be above the EU average, then declined strongly

• Public investment with large role, significant contribution from EU funds

• Private investment remains subdued, especially after 2015

• Low level of corporate investment

• Result of increased uncertainty and certain structural factors

11

Private investment (% GDP)

13

15

17

19

21

23

25

27

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

EU PL DE CZ SK

% GDPforecast

No short-term fiscal risks

• Narrowing fiscal deficit, driven by: economic cycle, labour market developments and better tax compliance

• Declining public debt ratio

• Less optimistic picture in structural terms

• Short- and medium-term path of the fiscal deficit uncertain following the announcement of a new social and tax package

12

2017/2018 change based on data for 3 quarters

Yearly change of tax-to-GDP ratios, 2016-2018

0.0

0.2

0.4

0.6

2016 2017 2018

VAT CIT SSC PIT

p.p.

Fiscal sustainability challenges exist

• Ageing population: drag on sustainability

• Pension system adequacy

• Health and long-term care

• The role of effectiveness and efficiency of public spending will be increasingly important

13

Proportion of population aged 65+

0

5

10

15

20

25

30

35

2015 2020 2030 2040 2050

EU PL

%

Financial sector is overall solid

• Banking sector is overall sound

• Well capitalised and profitable

• Stable modest lending expansion

• FX mortgage loans gradually paid off, but legislation uncertainty remains

• Independent financial supervision is crucial

• The state controls about one third of the banking sector and the largest insurer

• Stronger financial-sovereign links

14

Lending developments

0

2

4

6

8

10

12

14

16

Jan

12

Jul 12

Jan

13

Jul 13

Jan

14

Jul 14

Jan

15

Jul 15

Jan

16

Jul 16

Jan

17

Jul 17

Jan

18

Jul 18

Total privateNon-financial corporationsHouseholdsMortgage credit

% y-o-y

Investment: innovation

• Poland’s innovation performance remains modest

• Science-business links remain underdeveloped

• Higher education reform addresses some of the challenges

• Innovative activity of firms is hampered by some barriers

• e.g. limited access to highly qualified specialists

15

Poland’s ranking in Innovation Scoreboard, 2010 - 2017

EU BE

BGCZ

DKDE

EE

IE

EL

ES

FR

HR

IT

CY

LV

LT

LU

HU

MT

NL

AT

PL

PT

RO

SI

SKFI

SE

UK

-0.08

-0.06

-0.04

-0.02

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.0 0.2 0.4 0.6 0.8

Absolu

te c

hange E

IS (

2010 -

2017)

Member States EIS 2017

Investment: transport & ICT

• Road network in Poland has improved significantly with a key role of EU funds

• …but road safety remains a concern

• Progress in modernising the railways is slower

• Fast internet access developed quickly, but broad access to ultra-fast internet is a challenge

16

Network of high-speed roads until 2023

Investment: clean energy & environment

• Electricity generation dominated by coal

• Including recently built power plants

• Development of RES negatively affected by regulatory changes

• Investment to improve the energy efficiency crucial for containing demand for energy and to limit GHG emissions

• Limited interconnectivity adds to electricity price tensions

• Air pollution remains a concern

17

Gross electricitygeneration by fuel (TWh), 2017

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

EU PL

Solid fuels

Renewables

Gases

Nuclear

Other

Regulatory climate & public administration

• General business environment is favourable

• Compliance with certain administrative requirements is burdensome and may prolong investment processes

• Fast-track legislative procedures without proper public consultation feeds uncertainty

• Rule of law

18

Ease of Doing Business - Poland

60

62

64

66

68

70

72

74

76

78

80

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

DB10-14 methodology

DB15 methodology

DB16 methodology

DB17-19 methodology

in a scale from 0 to 100

Labour market, education and social policies

Joost Korte, DG EMPL

Labour market outcomes continue to improve

• Rising employment, accelerating wages

• Unemployment rate at the lowest level in recent history

• Shortage of skilled labour

20

Employment, wages, unemployment rate

-2

0

2

4

6

8

10

12

13Q

1

13Q

3

14Q

1

14Q

3

15Q

1

15Q

3

16Q

1

16Q

3

17Q

1

17Q

3

18Q

1

18Q

3

Employment growth y-o-y

Nominal wage growth y-o-y

Unemployment rate

%

But some structural challenges persist

• Low participation of certain groups:

• women

• older workers

• people with disabilities

• less-skilled people

• Labour market segmentation

21

* Provisional data

Enrolment in formal childcare,children below the age of 3

0

5

10

15

20

25

30

35

40

PL EU

2016 2017*

%

Education and skills: strengths and weaknesses

• Good PISA results and low early school leaving

• Low attractiveness of the teaching profession

• Reforms in higher education and VET

• Low participation in adult learning

22

Adult participation in learning

* Provisional data, % of population aged 25 to 64

0

2

4

6

8

10

12

PL EU

2017 2018*

%

Social protection and healthcare

• Poverty and income inequalities continue to decrease

• Structural challenges in social policy

• Future pension adequacy is a key challenge

• Healthcare affected by low public financing, staff shortages and misallocation of resources

23

Key poverty indicators, general population

0

5

10

15

20

25

30

35

40

45

50

05 06 07 08 09 10 11 12 13 14 15 16 17

At-risk-of-poverty-or-exclusion-rate

At-risk-of-poverty-rate

Severe-material-deprivation-rate

% of population

Regional dimension

Marc Lemaître, DG REGIO

Regional dimension

• All regions have been developing fast for the last decades

• Poland's success in the catching-up process is based on polycentric growth

• However, strong disparities persist in spite of the outstanding socioeconomic progress. They are even more pronounced at sub-regional level

25

Change in regional GDP per capita in PPS relative to the EU average (2006-2016),

depending on the 2006 starting point

-40

-30

-20

-10

0

10

20

30

40

0 50 100 150 200

change in % points

% of EU average in 2006

Regional dimension

• Urban-rural divide remains wide

• Large cities are the primary drivers of development while smaller cities struggle to adapt to rapid economic and technological transitions

• While disparities result from long-lasting structural issues, a targeted policy may help to reduce them

26

Urbanisation rate and regional GDP in PPS per capita, 2016

0

20

40

60

80

100

120

40 50 60 70 80

% of EU GDP average in 2016

% of population aged over 15

years living in urban areas

Poland