Poland’s GDP growth data leave no doubts: the slowdown has arrived. The economy keeps growing, albeit at a much reduced pace. Year-on-year growth in the second quarter was down to 2.4 percent from 3.5 percent in the first. “The GDP growth figures were much below expectations”, said Maja Goettig, chief economist at KBC Securities in Warsaw and member of the Prime Minister’s Economic Council.

Why worry, some will ask at this point, if the economy indeed keeps growing. True, but a developing country’s economy follows different rules than a developed country’s one. For Poland a growth rate below 4 percent is the same as a recession for Germany. When growth slows down, unemployment starts growing, and it is the lack of jobs, not the GDP readings, that is the most acute sign of an economic slump. “The joblessness rate fell to 12.3 percent in July, but this was a purely seasonal effect. At the year-end it may well rise to 13.5 percent”, said Ms Goettig.

While the Finance Ministry has recently freed up 500 million zlotys for job-market stimulation, the outlines of next year’s budget remain optimistic nonetheless: Minister Jacek Rostowski is officially expecting annual economic growth at 2.2 percent, the unemployment rate within the 13 percent mark. The snag is that Mr Rostowski has no control over any of these indicators and economists generally agree that his assumptions are unrealistic.

“Mr Rostowski is guessing, like everybody else, because he has no idea how long and deep the eurozone recession turns out to be. If growth slows down to 2.2 percent, unemployment will rise to 15-16 percent”, said Piotr Kuczyński, chief economist at Dom Inwestycyjny Xelion.

Short of shock absorbers

The present EU budget is drawing to an end, the 2014-2020 one will probably be less generous to Poland, and new EU-supported projects won’t kick off before 2015. Just like three years ago Poland was lucky to see an economic slowdown coincide with a peak in EU subsidies. According to the Finance Ministry in Warsaw, the EU’s contribution to Polish growth in 2013 will be no more than 0.5 percentage points.

The second “shock absorber” from three years ago – an unprecedented fiscal expansion – won’t be there either. When the global recession hit Poland back in 2009 and fiscal revenues suddenly fell sharply, the government, rather than cutting spending, hazarded a rise in public deficit to 7.4 percent of GDP to protect the anaemic growth. But instead of a recovery came another slowdown.

There only remains the third “shield”, that is, the free-floating exchange rate. In 2009, capital outflows caused the zloty to depreciate by over 30 percent, rapidly boosting Poland’s export competitiveness.

There are practically no “absorbers” except the zloty, and the only short-term instrument that can be used to stimulate the economy is controlled by the central bank rather than the executive branch. National Bank of Poland president, Marek Belka, has made it clear that interest rate cuts are on their way.

The government, in turn, is hardly in a position to stimulate growth in a big style. It is not only the money; the finance minister is above all hostage to his own promises. He has pledged to the European Commission to reduce public deficits to 2.2 percent of GDP in 2013, and if he eases off at this point, the financial markets will have the signal they need to start offloading Polish bonds. Debt-servicing costs will rise and the budget will be in shambles. Willing or not, the government is being forced to apply a belt-tightening, the dreaded “austerity” already familiar to Spain, Portugal or Greece, and fiscal discipline will inevitably prolong the slowdown.

Necessary to start targeting new markets

How does Poland intend to return to a fast growth track? How is it to achieve the minimum rate of 4 percent annual growth below which unemployment rises and the budget doesn’t balance?

After twenty three years of running a free-market economy Poland can no longer rely for its growth on simple competitive advantages and catching up with the developed countries. Wages in Poland are steadily growing and sooner or later we will cease to be competitive as a low-cost country. Wise people are saying that Poland should be developing its own manufacturing base, because productivity gains, and growth potential, are the highest in manufacturing. Without looking at other countries, Poland should identify the sectors in which Polish business does well and support them systematically. It is necessary to start spending on innovation. In other words, to start building a ship rather than continue waiting for the island to turn green again.

At the same time, it is necessary to start targeting new markets, not necessarily in the Far East, but rather behind the eastern border. “Russia has just entered the WTO, Ukraine and Belarus are great markets where Polish products have a good reputation. The flourishing border trade is the best proof of that”, said Mr Kuczyński.

It so happens that Poland’s policy towards the three countries that could be its largest markets is based on values and has hardly been effective. For Western Europe, Poland remains the subcontractor or an outsourcing destination, but for Eastern Europe it is the nearest modern economy, and one culturally closer than the German or Dutch ones. Without an expansion in the East, Poland won’t be able to offset a decline in eurozone exports.