Report from the 165th mBank-CASE seminar: Is the economy doomed to a long recession?

“Is the economy doomed to a long recession?” That was the question addressed at the 165th mBank-CASE seminar by two outstanding economists, Professor Andrzej Rzońca (Warsaw School of Economics) and Andrzej Halesiak (Association of Polish Economists). The discussion took place as data were still coming in about the shrinking of economic activity in Poland and around the world, driven by the pandemic and the mandatory shutdown of many service sectors. But the data are still incomplete, covering only the first two months of the pandemic. In turn, the forecasts for 2020-21 presented by international organizations are very tentative, and it is obvious that they will be amended many times as further statistical data come in. These are the circumstances in which our guests set out to explain the situation and the prospect for a post-pandemic rebound.

The first to present his diagnosis of the situation and its consequences was Professor Rzońca, who began by stressing that in the past 30 years, a recession is a new phenomenon for Poland, and until now we have seen the stability of economic growth as a given. He pointed out that in plotting our trajectory for exiting the pandemic-induced recession, what counts most of all is the scale of the initial shock, and secondly the strength of the economy’s rebound. Forecasts from the European Commission and other international organizations for 2020 which the author presented indicate that Poland looks relatively good compared with the rest of the EU: the drop in GDP resulting from the initial shock will be one of the smallest. Among the factors that put our country in a better situation in the short term, Professor Rzońca identified the economy's lack of strong dependence on a single sector (such as tourism), the floating exchange rate and the current account surplus.

But the forecasts for 2021 look a lot less optimistic: Poland is one of the countries with the lowest chances to quickly make up their losses. Professor Rzońca also stressed that the GDP forecasts currently being published by international institutions are based on quite an optimistic scenario, which assumes that there won’t be a second wave of the pandemic this autumn. According to him, the Polish government’s response to the crisis in the form of a very strong fiscal stimulus package goes against the conclusions that flow from the history of exiting previous crises. The application of strong fiscal stimulus in EU countries at that time didn’t lead to improvement during or after the shock, but it did have a clearly unfavorable effect in following years, mutating into a debt crisis and bringing negative consequences for economic growth. The Polish government’s misguided reforms (and anti-reforms) in recent years, which additionally reduce the chance of a smooth exit from the recession, were also pointed out. These include: reducing the retirement age, significant expansion of the benefits system, nationalization of sectors including in particular banking and energy, growth in tax obligations, and numerous regulations hindering companies’ operations and weakening the position of public institutions, particularly the judiciary system. Professor Rzońca concluded his presentation with a list of reforms necessary for the economic rebound to be strong and intense.

Andrzej Halesiak started his presentation by stating that in the crisis caused by the coronavirus pandemic, the situation is very strongly correlated with how the epidemic develops, and this is difficult to predict at the moment. As a result, we must take a cautious approach to all current economic forecasts. Thus he proposed that we focus on a long-term view of the problem. Taking this approach, he examined the crisis from a global perspective, with multiple dimensions in addition to its direct cause (the shutdown of a large part of economic activity as a result of the pandemic). Among them is a crisis of public services and strategic thinking, consisting in a lack of long-term planning and reliance on ad hoc, reactive measures dependent on the political cycle. Another dimension is a debt crisis (total debt, not public), which according to the latest data (from late 2019) reached a record 322% of global GDP. In addition to all this there are other challenges, such as the climate crisis, driven by irresponsible use of non-renewable resources, and the crisis of globalization resulting from the problem of division of profits, which to a significant degree end up in tax havens.

According to Mr. Halesiak, this diagnosis shows that we’re dealing with a fundamental problem in the operating model of states and societies, which requires reconstruction from the ground up. He indicated that three approaches are possible to the crisis of the contemporary model of how states and societies function: a) passively expecting that it will work out somehow, b) faith in a technological breakthrough that will remove or solve the current problems or c) a conscious evolution of the system. Of course, it this third approach would be best, but it’s also the most difficult. Changes will be unavoidable, if for no other reason than the grassroots pressure from society and business, in which fundamental changes are taking place, e.g. under the influence of growing automation and robotization. At the end of his presentation, Mr. Halesiak stressed the significance of civil society and social dialog in shaping a new system. In the long-term approach to the problem, the author sees a chance to exit the current crisis, which the pandemic has only sharpened.

The second part of the seminar was devoted to questions from the audience. In response to a question about his assessment of the National Bank of Poland’s current activities and a request to point to positive models of central bank operations in crisis situations, Professor Rzońca replied that the Polish version of quantitative easing is a hidden form of financing the budget deficit. Aside from the standard problems of conducting this type of policy, in the Polish case there is added the risk of causing economic turbulence. This threat springs directly from the structure of Poland’s banking sector, which has to a large degree been nationalized; the liquidity generated by the NBP ends up back in the central bank, rather than on the market.

Further questions concerned the effect of the coronavirus pandemic on international supply chains and the opportunities for Poland to take over certain operations from Asian countries. Responding to this question, Mr. Halesiak stated that in the very near future there will be a re-evaluation of supply chains to shorten then and bring elements of production closer to consumers. Professor Rzońca disagreed with this conclusion, saying value chains may become even longer and more complicated. Questions were asked about the assessment of the biggest mistakes in the government’s response to the pandemic, and what policies are necessary for the Polish economy to rebound as quickly and strongly as possible. Healthy audience interest meant there were too many questions for the presenters to address in the allotted time.

Summing up the seminar, it must be said that the diagnosis of the current economic situation presented by the speakers and the potential scenarios for exiting the crisis gave a broad view of the challenges facing economic policy in the short and long term.

Written by Adam Śmietanka