McKinsey: Polish economy can grow to €850 billion by 2025

The Polish economy can grow to $850 billion by 2025 if focus is placed on pulling up its socks toward higher productivity in key sectors, according to a recently released report from McKinsey & Company. While the Polish economy has done very well in the past 25 years, to become the growth engine of Europe and to bring itself in line with the GDP of southern European economies, a focus on improving productivity and improving workforce engagement will play a decisive role. 

Since the transformation of the Polish economy from centrally planned to market based in the early 90s, the country, after a short and painful period of transition, has seen remarkable growth. Over the past 25 years the Polish economy has grown from 32% to 60% of the Western European average (EU-15), with its annual growth between 1991 and 2008 reaching 4.6%. Following the 2008 crisis the, the economy still – relative to its European neighbours – managed impressive year-on-year growth of 2.7%. This growth record places the country in a position to be a growth engine for the European Union, as it plays catch-up to Western Europe.

In a recently released report from McKinsey & Company, titled ‘Poland 2025: Europe’s new growth engine’, the state of the Polish commercial economy is mapped out. The consultancy considers two scenarios: business as usual or accelerated development. The business as usual model sees little change in terms of development from its current levels of growth, with a moderate rate of 2.6% annually. In this scenario the negative drag on the economy from demographic shifts in the labour supply, and limited technology and efficiency growth, are not compensated for. If the Polish economy takes a different turn however, the country has the possibility of catching up to 85% of the projected EU-15 average (PPP). It would see its growth rate average above 4%, and see it attain the level of economic prosperity of Spain, Slovenia, or even Italy.

Improving productivity

While the Polish economy has the potential to reach high levels of development, it will need to break through barriers that will dampen its productivity in the mid-term. It is particularly productivity, according to the McKinsey report, that is holding back Polish growth. While the productivity gap between the European Union and Poland has, since joining the EU in 2004, been closed by 27%, parts of the economy remains comparatively unproductive. Four sectors account for nearly two-thirds of this gap vis a vis the EU:

One barrier Poland faces are shortfalls created by its low position in the value chain occupied by a majority of Polish industries; with particularly unfinished transformations in sectors like mining (77% productivity gap versus the EU-15 average), energy (48% gap), and agriculture (59% gap), along with the relatively low level of capitalization in the economy. Another significant barrier is Poland’s changing demographic; the consultancy noting that a countries GDP can be grown through an increase in labour participation or by increases in productivity. In the next decade, the “prime” working-age population (15 to 59) is expected to decline by 2.7 million, which will have a negative effect on labour participation and thus need to be compensated for. This decline will be coupled with a decrease in tax receipts and increased healthcare costs.

Furthermore, increased levels of participation will likely need to be found outside increasing labour burden on the working population, given the development trend generally favours decreased working hours. A further issue for the country is a lack of industrial capitalisation, with a lack of advanced machinery inhibiting the growth potential of various industries in terms of their competitiveness with other more advanced markets.

Moving forward

There are however a number of areas in which the Polish economy is strong, which will contribute to its potential to take the accelerated path in the coming decade, the McKinsey report finds. The working aged population is highly educated, with a 21.8% of the population over 24 having a degree. The cost of labour remains relatively low compared to its European neighbours, at $11.7 compared to Spain at $26.8 and the Netherlands at $41.4. Further advantages are its local proximity to the EU – the country is within reach of a highly attractive opportunity as a supplier of processed goods to many affluent markets. It has large tracts of arable land, which places Poland in a good position to become a pan-European food-production and processing hub.

In addition, Poland’s 38.5 million people also create a large internal demand, one of the key factors that helped it come strongly through the aftermath of the financial crisis. With a final blessing for the economy the ease of doing business in the country, which, according to the World Bank’s ease-of-doing-business ranking, Poland advanced from 76th place worldwide in 2009 to 32nd place in 2014.

By focusing on the positives; and in moving toward overcoming the barriers in the poorly performing industries and making the labour market more attractive for older workers, youth and now immigrated workers, the strategy consultants project a bright future for Poland.

Recently McKinsey & Co. performed a similar analysis for the Indian economy, while rival The Boston Consulting Group assessed the economic outlook for the Nordic countries.