Risks and Trends

Stagflation as a major challenge for the global economy

Takeaway 2022-10-25
Inflation and low economic growth are a problem for businesses and governments. An accelerated green transition may help, but it will be more difficult to finance.


Stagflation will increase the extent of global poverty. During the Risks and Trends "How to survive stagflation" panel, Gallina Vincelette, World Bank Country Director for the EU, stressed the social consequences of increasingly slower economic growth and rising costs of living. According to the forecasts she referred to, at the end of the year, the number of people living in extreme poverty in the world may increase to 685 million. Paweł Borys, president of the Polish Development Fund, was more optimistic, as he believes that both Poland and the global economy will avoid long-term stagflation. This will be possible as a result of a flexible and adaptable economy - in Poland, it will be also favoured by the fiscal policy. Borys opted for a cautious approach to combating inflation, as its rapid reduction could lead to a significant increase in unemployment.

The current crisis will be different from the one experienced over 40 years ago. Borys pointed out that analogies to the times of oil shocks and stagflation in the 1970s and 1980s are not well placed. Since then, the structure of the global economy, as well as its institutional environment have significantly changed, for instance, with regard to independent central banking. Jan Piotrowski, the business editor at The Economist mentioned other risks that are faced by today's economies, particularly in developed countries - greater public debt and an unfavourable demographic structure, which generates higher public spending, for example, in the healthcare sector. Julia Patorska, partner associate and economic expert at Deloitte, argued that the ageing society limits the supply of labour, which means that the risk of rising unemployment is now much lower than in the previous century.

Managers are not prepared for a crisis. Piotrowski mentioned a poll conducted by The Economist, which revealed that the CEOs of the largest companies (from the S&P500 index) do not remember the previous stagflation, which may mean that they will be inadequately prepared for the current crisis. Patorska added that in Poland, due to historical factors, this awareness of risks is even lower. She also pointed out that small and medium-sized businesses form a large part of the Polish economy and they are less resistant to crises and less flexible with regard to new challenges.

The climate transition is a challenge for companies. According to Patorska, rising energy prices have motivated some companies to accelerate the green transition, which includes investing in their own renewable energy sources. According to Vincelette, in the long run, such an energy transition may result in lower inflation. At the same time, she also believes that state support policies that freeze energy prices and suspend some mechanisms of climate transition (among other things, by phasing out coal-based energy) will only bring short-term benefits. However, according to Borys, in the current conditions, limiting the increase in energy prices by the state is a good solution, as it helps to anchor inflation expectations and counteracts the setting of high inflation.

Reforms and investments can help stimulate growth. In the efforts to counteract the current crisis, Vincelette recommended a decisive fight against inflation and targeted, temporary (but one that reflects the needs) support of social groups that need such support the most. In her opinion, good targeting of aid is all the more important as countries that emerge from the pandemic do not have the fiscal space to significantly increase spending. According to her, the pace of economic growth may increase as a result of structural reforms. A study conducted by the World Bank shows that Poland could accelerate its potential GDP growth if it increased economic activity (especially among the elderly) and invested in digitisation and green transition.

The fight against the crisis is hindered by higher costs of debt. Borys and Piotrowski referred to the recent problems with debt servicing costs experienced by the UK and indicated that higher debt yields are a new standard to which politicians (but also companies) will have to adapt. Patorska drew attention to the possibility of consolidation of public finances in Poland, for instance, by limiting transfers and support mechanisms targeted at wide groups of consumers (13th and 14th pensions, anti-inflation shields, and energy subsidies). She also called for the unblocking of KPO funding. Boris defended the government's fiscal policy. He stressed that it was justified by social (low pensions in Poland) and economic (protection of businesses) premises, although in his opinion there should be time constraints for state support.

Risk and Trends 2022 partners include Amazon, Deloitte, Grupa Żywiec, IKEA, Janssen, KGHM, Żabka Group, European Council on Foreign Relations and Clean Air Fund.

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Hanna Cichy
Head of Business Desk
Hanna Cichy
PI Alert

EU summit: Member States launch discussion on financing joint defence initiatives

State of play

Leaders approved appointments to top posts. At the EU summit that ended on Thursday night, they nominated Ursula von der Leyen for a second term as head of EurCom, former Portuguese Prime Minister António Costa as head of EurCou and Estonian Prime Minister Kaja Kallas as head of EU diplomacy. Italian Prime Minister Giorgia Meloni abstained from voting for von der Leyen and voted against Costa and Kallas. This means that Meloni is preparing for tough negotiations and may demand a high political price in return for his party's support for von der Leyen in her approval in the EurParl. Prime Minister Viktor Orbán voted against von der Leyen and abstained on Kallas.

They adopted the Union's strategic agenda for 2024-2029. Over the next five years, the Union's goals include a successful digital and green transformation by "pragmatically" pursuing the path to climate neutrality by 2050. Another objective is to strengthen the EU's security and defence capabilities.

Von der Leyen spoke of EUR 500 billion for defence over a decade. This was the EurCom estimate of needed EU investment presented by its head at the EurCou meeting. Poland and France were among the countries that expected the EurCom to present possible options for financing defence investments before the summit, such as EU financing of common expenditure from a common borrowing. This idea was strongly opposed by Germany and the Netherlands, among others. In the end, von der Leyen decided to postpone the debate until after the constitution of the new EurCom, i.e. in the autumn. And the summit - after von der Leyen's oral presentation - only launched a preliminary debate on possible joint financing of defence projects.

Poland has submitted two defence projects. These might be co-financed by EU funds. On the eve of the summit, Poland and Greece presented in writing a detailed concept for an air defence system for the Union (Shield and Spear), which Prime Ministers Donald Tusk and Kyriakos Mitostakis had put forward - in a more general form - in May. In addition, Poland, Lithuania, Latvia and Estonia presented the idea of jointly strengthening the defence infrastructure along the EU's borders with Russia and Belarus. Poland is pushing for the EU to go significantly beyond its current plans to support the defence industry with EU funds and agree to spend money on defence projects similar to the two proposals. But EU states are far from a consensus on the issue.

Zelensky signed a security agreement with the Union. The document, signed by President Volodymyr Zelensky in Brussels, commits all member states and the EU as a whole to "help Ukraine defend itself, resist efforts to destabilise it and deter future acts of aggression". The document recalls the EUR 5 billion the EU intends to allocate for military aid and training in 2024 (in addition to bilateral aid from EU countries to Kyiv). It says that "further comparable annual increases could be envisaged until 2027, based on Ukrainian needs" i.e. it could amount to up to EUR 20 billion. Ukraine's agreement with the EU comes on top of the bilateral security "guarantees" Ukraine has already signed with a dozen countries (including the US, UK, Germany, France, Italy). As Prime Minister Donald Tusk confirmed in Brussels, talks are also underway between Ukraine and Poland on the text of mutual commitments on security issues.

PI Alert

KO wins elections to the European Parliament

KO received 38.2 per cent of the vote and PiS 33.9 per cent, according to an exit poll by IPSOS. Konfederacja came in third with 11.9 per cent, followed by Trzecia Droga with 8.2 per cent, Lewica with 6.6 per cent, Bezpartyjni Samorządowcy with 0.8 per cent and Polexit with 0.3 per cent. According to the exit poll, KO gained 21 seats, PiS 19, Konfederacja 6, Trzecia Droga 4 and Lewica gained 3. The turnout was 39.7 per cent.

According to the European Parliament's first projection, the centre-right European People's Party (EPP), which includes, among others, PO and PSL, will remain the largest force with 181 MEPs in the 720-seat Parliament. The centre-left Socialists and Democrats (S&D), whose members include the Polish Lewica, should have 135 seats, whereas the liberal Renew Europe club (including Polska 2050) will have 82 seats. This gives a total of 398 seats to the coalition of these three centrist factions (EPP, S&D and Renew Europe) on which the European Commission under Ursula von der Leyen has relied on so far. The Green faction wins 53 seats according to the same projection, the European Conservatives and Reformists faction (including PiS) 71 seats and the radical right-wing Identity and Democracy 62 seats.