A European success story

A European success story

Which EU economy has seen the fastest growth in GDP per capita over the last 20 years?

• The answer is Poland. Polish GDP per capita has risen 116% since 2004, well above the EU average of 27% and a larger increase than in other fast-growing economies such as Ireland, Romania or Spain. 

• Poland’s trend growth of 3.7% is well ahead of the US and roughly three times German and French rates. Unlike western Europe, Polish incomes are on a rapidly rising trajectory.

• As the US economist Noah Smith notes, “Poland ranks only behind South Korea as the great economic miracle of modern times. In 1990 it was a dysfunctional post-communist economy that was significantly poorer than Russia; now, the IMF expects it to soon overtake Japan, Spain, and Israel in per capita GDP”.

• Poland’s transformation started well before it joined the EU in 2004. In contrast to the more gradual approach of other eastern bloc countries, Poland embraced “shock therapy” reforms in 1990, following the fall of its communist regime, with overnight price liberalisation, privatisation and a raft of pro-market reforms.

• The reforms caused major social and economic disruption but, following a sharp recession, helped lay the ground for 28 years of uninterrupted growth, including through the global financial crisis. The pandemic ended that remarkable run, but the Polish recession of 2020 was milder than in most other European countries and growth bounced back to pre-pandemic rates.  

• The Poland that entered the EU in 2004 was a reformed, fast-growing economy. Membership enabled Poland to benefit from large infusions of regional and infrastructure funds and access to the EU’s vast single market. Poland borders seven other economies, four of them in the EU and the openness that has come with joining the EU has boosted trade, foreign investment, migration and innovation.

• Unlike South Korea, where home-grown start-ups that developed into global brands, Poland’s economic revival has relied on foreign direct investment (FDI). Low costs, improving infrastructure and the creation of special economic zones helped bring in foreign capital and expertise. The ensuing rejuvenation of manufacturing has, in turn, helped fuel exports and productivity growth.

• Poland scores well in terms of education, with the OECD’s PISA attainment scores on maths, science and reading above German, French and Italian levels. Despite strong growth, wage rates remain less than half those in western Europe, meaning Poland remains an attractive location for manufacturing and outsourced services. Unemployment stands at just 3.2%, one of the lowest rates in the EU. Polish equities have delivered strong returns, easily outperforming UK and wider euro area markets in the last five years. 

• Poland is one of the great post-communist success stories. What gets less attention is that most central and eastern European economies have also enjoyed strong growth. All of the countries that joined the EU in 2004 and 2006 have grown more rapidly than their western European peers. Performance, nonetheless, varies widely, with, for instance, Hungary’s economy expanding by 45% since 2004 compared to growth of 107% in Poland (a rate exceeded only by Malta, whose economy has expanded by 170%). Despite Poland’s superior growth rate, GDP per capita is higher today in Slovenia and the Czech Republic than Poland.

• Nevertheless, Poland has economic heft. With a population of 38m people it is far larger than any other central or eastern EU country. It is the EU’s sixth-largest economy, below the Netherlands and ahead of Sweden. It is also playing an outsize role in the defence of Europe. Poland is expected to spend the equivalent of 5% of its GDP on defence this year, more than any other NATO country and more than twice the level of spending in Germany or the UK. Its armed forces are now the third largest in NATO behind the US and Turkey. Poland fields about 600 tanks, roughly four times British levels. A successful economy coupled with a keen sense of the threat from Russia has turned Poland into a major European military power.  

• Poland has come a long way since 1990. Prospects for growth look positive through the rest of this decade.
   
• Perhaps Poland’s main challenge, one it shares with its neighbours, is demographic. Last year the number of births dropped to the lowest level since the second world war. Poland’s fertility rate is one of the lowest in the EU. Poland’s population is shrinking, albeit far more slowly than in, for instance, Bulgaria and Lithuania, where populations have contracted by more than 20% since 1990. Adaptability and resilience have been the hallmarks of Poland’s economic rebirth. Those qualities will stand it in good stead as it adjusts to an older, shrinking population.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.2% at 9,698. The S&P 500 US equity index fell 0.8% last week amid increasing investor concern over the high valuation of large US technology firms.

Economics

• The US Senate passed a bill to end the longest-ever government shutdown, triggering a rally in equity markets
• The US administration agreed trade deals with South American countries including Argentina and Ecuador. Switzerland also reached a trade agreement with the US that includes reducing tariffs from 39% to 15% in return for Switzerland investing $200bn in the US
• Chair of the US National Economic Council Kevin Hassett said the US administration may reduce import tariffs on food items in a bid to lower food prices
• UK GDP grew at the slower-than-expected pace of 0.1% in the third quarter due to weak service sector growth and declining production, in part caused by the large cyber-attack at Jaguar Land Rover 
• UK unemployment increased by more than expected to 5% in the three months to September, while wage growth slowed to 4.6%. UK gilt yields declined on the news as investors increased bets that the Bank of England will cut interest rates in December
• UK gilt yields rose on Friday over investor concerns for the public finances following a report by the FT that the UK government has abandoned planned income tax rises in the upcoming budget
• The UK’s Office for National Statistics said it will reduce data outputs by 10% next year as part of turnaround plans to improve the data quality of key statistics
• Euro area GDP increased by 0.2% in the third quarter, up from 0.1% in the preceding three months
• German investor sentiment deteriorated slightly this month, according to research institute ZEW, due to a falling confidence in the “capacity of German economic policy to tackle pressing issues”
• EU finance ministers agreed to speed up the imposition of handling fees on small packages ordered online from retailers such as Shein and Temu in a bid to protect domestic retailers from overseas competition
• The French parliament voted to suspend president Macron’s pension reform bill, as the government continues its attempt to pass a budget for next year. The measure suspends the reforms, including increasing the state pension age, until 2028
• Scotland plans to sell £1.5bn of government bonds, or ‘Kilts’, over the coming years following it being given the same credit rating as the UK
• The International Energy Agency said that demand for oil and gas will keep rising for the next 25 years if the present trajectory is maintained, sparking concern over the impact on the climate
• Canadian lumber companies plan to export their products to new markets, including the UK and EU, in response to the US administration increasing tariffs on lumber imports by 10 percentage points to 45%

Business

• Japanese car manufacturer Toyota promised to invest an additional $10bn in the US over the next five years
• Google filed a lawsuit against a Chinese hacker group, claiming it is selling software to help criminals run online phishing scams
• The US Federal Trade Commission launched an investigation into proxy advisory firms ISS and Glass Lewis over potential antitrust violations
• Japanese investment company SoftBank Group sold its stake in US chipmaker Nvidia as part of plans to fund its growing investment in AI technology research company OpenAI
• UK supermarket Co-op announced a £200m expansion programme to open or refurbish 50 new stores
• Energy company SSE aims to raise £2bn in equity as part of a wider £33bn investment plan to upgrade and expand the UK’s electricity network by 2030
• The UK government chose the island of Anglesey off the coast of Wales to host the UK’s first small modular nuclear reactor
• Senior executives of HSBC and Barclays said that restrictive capital requirement rules were penalising UK banks compared to US rivals and private credit groups that face less stringent regulations
• UK investors pulled a record £3.6bn from equity funds last month amid fears of overvalued equities and concerns over tax rises in the upcoming Autumn Budget, according to fund network company Calastone

Global and political developments

• Russia undertook a large-scale missile attack on the Ukrainian capital city, Kyiv, the latest in Russia’s recent campaign that has focused on targeting Ukrainian energy infrastructure
• US president Donald Trump said he has “an obligation” to sue the BBC for more than $1bn over its edit of one of his speeches in a Panorama documentary. The BBC apologised to Mr Trump for the edit but rejected his demand for compensation
• The US plans to increase military exercises in Trinidad and Tobago, close to the Venezuelan coast, as it increases operations against drug traffickers in the region
• The UK has paused some intelligence sharing with the US over concerns about the legality of military strikes on suspected drug smugglers in the Caribbean, the FT reports
• The European Commission will establish a new intelligence body as part of attempts to improve the collation of information across national spy agencies
• The UK Civil Aviation Authority said “it’s not a question of if, only of when” UK airports would be disrupted by organised drone attacks similar to those in Belgium earlier this month
• Extensive briefing to the press over a potential leadership challenge to UK prime minister Keir Starmer sparked a political row, not least as the origin of these reports was contested

And finally… after 230 years, the US Mint officially ceased production of its one-cent coin. Digitisation of payments and production costs of almost four times the coin’s value led to the decision to stop production – spent penny