The war in Ukraine – implications for the Polish economy

Inevitably, the Russian invasion into the Ukraine, even if hopefully the warfare stays beyond Poland’s border, has and will have impact on our lives. While keeping fingers crossed for the Ukraine’s victory over the heinous aggressor, I am trying to sum up what the conflict means for my country’s economy. As the course of events is difficult to predict, I shall focus on short-term effects, triggered by what has happened so far and split my analysis into eight areas.

1. The labour market.
Currently two sectors face a scarcity of workforce, namely construction and transport which both employ many Ukrainian male workers, some of who have decided to return to their homeland to take up arms. The flow of Ukrainians in productive age into Poland in turn comprises mostly of women (men aged 18-60 are not allowed to leave Ukraine, with some exceptions). They are willing to find a job, yet nobody knows how long the situation will persist and therefore how many of them will come up with supply of work. Quite many of the refugees surely hope the war ends soon and they will be able to return to their homes.

2. The housing market
The inflow of several hundred thousand Ukrainians to Poland (I count out those in transit) trigger a rising demand for flats for rent. The supply of dwellings is constantly dwindling, with many Ukrainians affording to rent flats at market rates. Vacancy rate is going to go down, prices have reportedly nudged up. Poles looking for a place to rent have it now uphill, but with some landlords unwilling to let their spaces to Ukrainians, everyone will find a roof over their head. I hold back from foreseeing a trend in property prices, as there are several other factors which will impact them, with interest rates, rising costs of living and mounting construction costs coming to the fore as price-shapers.

3. The exchange rate
I believe unless something unexpected happens, financial markets are already past the shock phase, though volatility remains high. The Polish currency after hitting levels unseen since two decades (or never seen) is slowly appreciating, but I suppose it will level off at above 4.50 (EUR/PLN) and 4.00 (USD/PLN).

4. Inflation
Given that cutting down on deliveries of commodities from Russia has triggered a negative persistent supply shock and that wheat yields might be even 25% lower, which is bound to bring up food prices, we need to brace for a double-digit inflation lasting for over a year, until the base effect begins to work (alternatively we might fall into a spiralling inflation, bring it under control might be painful).

5. Government finances
Given that accepting refugees from Ukrainians and providing them with humanitarian aid will be shifted from citizens and NGOs to the central and local governments, the budget deficit is likely to rise. What the government definitely needs to do is to arrange a scheme of covering those expenses by the European Union. The costs of helping Ukrainians should be shared equitably, while Poland, by dint of being geographically on the frontline, will be one of the main beneficiary of those funds. Solidarity within the EU must manifest itself in that area.

6. Foreign trade
Here I expect little to happen – I hope once Ukraine emerges victoriously from the war, it will become one of Poland’s main trade partners. The trade with Russia and Belarus, except for commodities, used to be quite marginal and those engaging in it were accepting high political risks. The risks have materialised, risk-takers have to lick wounds. I have no sympathy for them.

7. Consumer habits
Over the recent weeks many households have spent lots of money on humanitarian aid to Ukrainians. They have also realised living costs are bound to go up and austerity might set in. I predict consumers will be less reckless in spending and will think twice before giving away money. With the rising costs of dwelling upkeep, transport and food, discretionary spending is likely to go down.

8. Getting greener
The positive side effect of the war will be acceleration of efforts to decrease the reliance on fossil fuels. In the short run a good time to decrease the temperature inside your house, to give up on driving unless really necessary (I can boast of driving merely 294 kilometres since my last visit to the petrol station on 12 February when I fuelled up my car’s tank to the full, paying mere PLN 5.18 per litre).