FOR Communication 23/2023: Stagflation: The legacy of PiS's economic policy
The data published by Eurostat reveals an alarming situation in which the Polish economy is now. In comparison to other economies in the European Union, it appears to be very weak in terms of economic growth and, simultaneously, particularly affected by inflation.
In the second quarter of this year, compared to the same quarter last year, Poland's GDP declined by 1.3%. This result not only significantly lags behind Ireland, which has been the leader of European growth for many quarters, with its GDP continuing to grow (by 2.8%), but also the EU average, which, although moderate (0.5%), remained positive. In a quarter-to-quarter comparison, Poland's GDP decreased by a staggering 3.7%, marking the worst result among all EU countries.
In August 2023, Poland's inflation, while slightly decreasing, remained in single digits (9.5%). Only three countries had higher inflation rates. In the vast majority of EU countries, inflation has been in single digits for several months, with the EU average for August standing at 5.9%. Denmark, the leader in inflation control, had a rate of 2.3%.
Among various potential macroeconomic scenarios that may unfold, the combination of a contracting economy and high inflation constitutes the worst-case scenario, and this is precisely what is emerging in Poland today. This is not a sudden or surprising phenomenon but rather the consequence of errors in economic policy made in recent years.
Errors in monetary policy were sequentially committed since spring 2020:
- Interest rates’ cuts in March, April, and May 2020, bringing rates close to zero (0.1%).
- A six months’ delay - until October 2021, to start a tightening cycle.
- Interruption of rates hikes in September 2022 at 6.75%, leaving the real interest rates deeply negative.
The fact that inflation in September 2023 (8.2%) was lower than the peak in February 2023 (18.4%) is not a result of NBP's policy but rather a consequence of stabilization in the prices of food and energy resources globally. Many countries experienced similar slight decreases in inflation during the same period. Regardless of the propaganda banners displayed at the NBP headquarters in Warsaw and the propaganda rants delivered at press conferences by President A. Glapiński, the failures in monetary policy cannot be concealed, and the solid evidence lies in the core inflation. This indicator, calculated by excluding food and energy prices, was 9.3% in July 2022, reached a peak of 12.3% in March 2023, and stood at 10% in August 2023. This means that core inflation, which is the main area where monetary policy can and should have an impact, has frozen at a level close to 10% for several quarters. This will significantly hinder the return of the CPI inflation rate to the target (2.5% ± 1 p.p.), which becomes even more challenging due to two unwarranted and premature interest rate cuts made during the election campaign. If monetary policy in recent years had been managed in accordance with the rules rather than dictated by the expectations of the ruling party, the CPI inflation rate could now be much closer to the European average - almost half of today’s.
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Contact to author:
Prof. Dariusz Filar, economist, FOR external expert
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