“The Impact of War in Ukraine on the Polish Economy (2022)” (Second Part)

(by Dr. Rafał Kusy)

With reference to 4)

The inflow of refugees from Ukraine should also increase consumer expenditures. According to with economists from  BNP Paribas bank,   the cost of living of 1 million persons in Poland would amount to over 20 billion PLN  for one year  (approx.. 1% of the GDP). There are some estimations about the arrival of even more millions of persons from Ukraine. Such a huge influx of Ukrainian citizens to Poland may have an impact on the labour market and may be supportive for enterprises facing a lack of labour, however this will depend in which way and when the war will end. Within a short period of time warfare could lead to a tightening shortage of labour forces due to the Polish labour market not being structurally tailored to this situation and due to persons seeking protection (the most number of refugees are women and children). The Ukrainian citizens represent about 4% of persons working in Poland. In some sectors for instance within the construction business this participation may even exceed 10%, however after the outbreak of war many men left Poland to defend their country and arising vacancies will be difficult to fill taking into consideration the rather low number of the unemployment rate. In addition, we can also expect higher fiscal costs. If we help immigrants through private and public funds, then this covers health, social, legal aid etc. – and this is naturally a cost consuming endeavor but if some refugees decide to stay and to start families, then it may improve our demographic situation. Sadly, we have an ageing population. If the generation of the last demographic boom  – the present 40s – will retire one day, then their living has to be somehow maintained and there will not be enough young people to finance this from their social contributions. The refugees from Ukraine can be a chance to fill this gap.

With reference to 5)

Economic growth may also be negatively influenced by the increased uncertainty discouraging companies from doing new investments and forcing consumers to bear expenditures on durable goods. This uncertainty is reflected on the financial markets, for example in the higher profitability of Polish bonds arising from tightening monetary policy and higher risk premiums. According to economists from BNP Paribas bank economic growth may positively be impacted by a more looser fiscal policy due to the war. An increase of expenditures for the refugees aid and armaments should give a positive pulse for businesses, however, this will not be enough to balance negative factors and economic activity.

Bank experts see a greater opportunity in reaching a compromise with EU institutions as it comes to the rule of law issue in Poland and emphasize that the launching of a National Reconstruction Plan (NRP) would be a positive signal not only for the economy but also for financial markets. However, a real impact of funds raised within the scope of the NRP for the economy can be visible by the end of this year or next year as the allocation granted for Poland needs time to be implemented and served.

With reference to 6)

The level of public debt will increase as new social programs will be implemented to finance a longer list of needs including the announced higher expenditures on armaments. All of this will have an impact on public debt that currently amounts to 60%. However, a part of the public debt is considered beyond the official budget, for instance National Holding Bank and Polish  Development Fund issues bonds that may be used to finance any anti-crisis shields and this will not lead to a raise of the official debt level as these are no-budget funds.

With reference to 7)

The decision of the Monetary Policy Council will be of influence for Polish currency. In recent days the Polish Zloty has grown stronger after at the beginning of March and a panic on markets the rate exchange of EUR/PLN, CHF/PLN i USD/PLN was boosted to record breaking levels. After the outbreak of war, the strong Polish currency significantly depreciated. The capital is floating away from Poland because there is a geopolitical risk associated with the war being so close to Polish borders. A risk-aversion is growing in countries having large capital resources. Funds will be withdrawn from countries that are geographically located in the vicinity of the ongoing war. Contrarily, currencies such as USD, EUR and CHF have become stronger as the capital is floating back. This is similar to the situation in 2008 during the major global financial crisis. From the perspective of the United States or Japan we are very close to a long–lasting conflict and the PLN is weakening fast.

The weak Polish PLN supports the competitiveness of  Polish exports however, the more weaker the PLN, the higher the inflation pressure is. Imported goods will be thus more expensive for us due to a fragile currency and if we look for their replacement in our own country, this will increase the demand and drive up inflation.

The Monetary Policy Council has clearly stated that interest rates will be raised and this measure may increase the resistance of trading of Polish currency in the event of the raise of global risk-aversion, although we have to reckon with real significant short-term weaknesses. Any interventions in the currency markets are also possible and the Polish National Bank made use of this at the beginning of March 2022. In addition, the Minister of Finance plans to exchange Union funds on the monetary market. Economists from BNP Paribas bank are of the opinion that the space of the permanent weakening of the exchange rate of  Polish currency is rather narrow and their significant strengthening will be possible after a decrease in geopolitical tensions.

An example of a lower influence of the Monetary Policy Council on capital markets was its raise of interest rates on the day of the April session. The markets initially responded to this decision through a decline of the EUR/PLN by almost 2 pennies up to 4.60 EUR/PL and the banks’ share prices bounced from under the line. Within the next couple of minutes the PLN dropped and returned back to the level of 4.63 EUR/PLN while banks’ shares lost part of their proceeds and fell below the line again. Thus the increased impulse of the banking sector was not stable after the increase of the interest rate and as a result main indexes suffered losses within the segment of bank stocks as  from previous days. Decreases were in correlation to basic indexes.

With reference to 8)

Russia and Ukraine are not important business partners for Poland when it comes to trade in agri–food products, however, there are some kind of goods participation of which importation is substantial. We import from Russia on a large–scale for instance frozen fish–cod and pollack and we sell there e.g. fries, bread and chocolate products. The war in Ukraine may also be problematic for some companies from the dairy industry.

With reference to 9)

There is pressure to decrease share prices throughout the whole European market as investors are expecting the further imposition of embargoes for oil and gas from Russia in the future. As already mentioned oil prices have gone up and gold trading prices showed upward trends. An additional negative mood shall be deemed as speculation about information in the light of the publication of the FOMC report. According to the chair of the Federal Reserves, they should contain more details related to e.g. the pace of balance sheet reductions of the Federal Reserves System. Their Vice-Chair, Lael Brainard, suggested that Federal Reserves will commence with a reduction of the balance sheet already in May 2022. Concerns about a possible recession of the world’s biggest economies are based on growing number of signals pursuant to Mr. Krzysztof Kolany. Over the last few weeks three recession signals emerged from the U.S. If  history repeats itself, then the U.S. may be affected by recession with all its consequences for financial markets. So far the recession in the USA was triggered by two factors: oil shock and the rise of the interest rate within Federal Reserves and the third factor: “labour market” may now be added.

The first recession signal emerged in March 2022 after the Russia’ invasion of Ukraine when the prices for oil and ready fuels rapidly went up although they had become more expensive already in the previous month. For instance trading in crude oil on the stock exchange market in London more than doubled from December until March. US crude oil WTI also doubled in price within almost three months. Although there was no lack of fuel at petrol stations, we can talk about oil shock and the increase of transportation costs.

The second recession signal arrived at the beginning of April 2022 when the so–called “yield curve of inversion on the treasury bond market occurred. For the first time since August 2019 the profitability of 2-year bonds was higher than of 10 – year bonds. It is usually the other way round – which means the bond at the long end of the curve shall be characterized by higher profitability. Investors had already been for many months discounting expected increases of interest rates within Federal Reserves. From March 2020 until March 2022 Federal Reserves maintained an interest rate of federal funds close to zero and were late in reaction to very high inflation (CPI). According to estimations of the futures market, the management of Federal Reserves may raise interest rates by 50 basic points by the end of this year driving up the price of the credit to 2.5 – 3.0%.

The third recession signal shall be deemed the unemployment rate, the so–called “U-3 rate”. Over the last 70 years almost all recessions in the U.S. were preceded by a bottom of the cycle of the unemployment rate U-3. At the beginning of April 2022, a report on the U.S labor market showed a deep decline of the unemployment rate by up to 3.6 %. Despite the fact that the U.S. labour market returned to its state prior to the Covid-19 -related lockdown,  Americans are unhappy. The reasons for this unhappiness are very high inflation resulting in a real fall of the purchasing power of wages as well as record -high prices for cars and real estate property that are virtually not accessible by the average  U.S. citizen. Within the last 45 years such low readings of this indicator were identified only during recessions and in the second half of 2011 and consumer demand constitutes about 70% of U.S. GDP.

All these signals of the recession and a possible embargo on oil and gas from Russia will lead to far reaching economic consequences, although a slowdown of  the economy would be the most lenient scenario. However, the risk of recession remains relatively high. As you can see, the economic consequences of the war in Ukraine will resonate in the echoes not only in our country but throughout the entire world economy.