What could be the factors for the decline in the overall level of investment in the economy despite the available various instruments for external financing of economic activity, low inflation, normalized economic situation?
What could be the factors of the demonstrated for the period of the last few quarters decline in the overall level of investment in the economy in a situation characterized, among others, by such factors of influence on economic processes as available various programs and instruments of external financing of economic activity, low inflation, low unemployment, normalized general economic, macroeconomic situation, etc.?
According to the prevailing macroeconomic forecasts, the Polish economy in 2024 and 2025 should be in a trend of improving economic growth rates. In February and March 2024, inflation fell to a low level close to the inflation target. In addition, in the second half of 2023, there was a clear improvement in the residential real estate sector, due to the introduction of a government program to activate the purchase of real estate by citizens on credit, i.e. the “2% Safe Credit” program.” A year ago, the macroeconomic situation in Poland indexically looked much weaker than now. The level of economic growth was lower and was below zero, i.e. there was a recession. This was the second recession since the Covid-19 pandemic, i.e. since 2020, and the first after the end of the pandemic. The recession of the first half of 2023 was due to a decline in the economic activity of companies and businesses, as a result of the various crises that occurred during and after the Covid-19 pandemic. These downturn factors include the pandemic economic crisis with the deep recession of the economy, which occurred mainly during the first wave of the pandemic, i.e. in the spring of 2020. In addition to this, the rapid increase in inflation, which in Poland began from the 2nd quarter of 2021. This growth continued until February 2023, when consumer inflation, according to the Central Statistical Office, reached 18.4 percent. In 2022, Poland experienced a deep energy crisis generated by the increase in fossil fuel prices. The energy crisis was deep in Poland due to the still high share of up to three-fourths of conventional energy sources, i.e. based on burning fossils, mainly coal and lignite, against the background of the overall mix of energy sources. The increase in costs associated with high fossil fuel prices, high energy prices, and more expensive bank loans generated a downturn in the economy in the 2022-2023 period. The increase in interest rates on bank loans, including business loans, investment loans offered to companies and businesses by commercial banks was a derivative of the anti-inflationary raising of interest rates by the central bank, i.e. the National Bank of Poland, which lasted from October 2021 to September 2022. In addition, the changes in the fiscal system carried out in 2022 under the government's Polish Deal program also caused many organizational and financial problems in a significant part of the functioning business entities. In addition, all of the aforementioned crises and the changes applied by the central bank in terms of the monetary policy pursued also negatively affected the PLN exchange rate against other currencies and generated a high amplitude of changes in the PLN exchange rate, which also negatively affected many business entities operating in non-financial sectors of the economy. The increased scale of exchange rate volatility primarily negatively affected enterprises that exported a significant part or most of their production to countries with a different currency. The amount and share in terms of production of products against the economy for such enterprises has increased significantly since 2004, when Poland became a member of the European Union. An important issue confirming the not-so-good economic and financial situation of companies and enterprises in Poland recently is the fact that in 2023 the historically largest scale of declared bankruptcies of business entities and the termination of their activities occurred. All of the above-mentioned issues have negatively affected the operation of many companies and enterprises operating in Poland over the past few years. Currently, in 2024, positive in its content forecasts of macroeconomic developments in the domestic economy determined for the next few quarters prevail. In addition to the currently low inflation and stabilized economic situation, there has recently emerged an important pro-development factor, which is additional subsidies from the European Union. Well, at the end of 2023, previously granted EU subsidies and low-interest loans were unblocked for Poland under a financial program referred to as the National Recovery Plan. Because the funding Poland will receive in the 2024-2025 period from the National Reconstruction Plan program and also funding under the European Union's Cohesion Programs will be historically record high. Consequently, many new investment projects will probably be carried out using this money. In view of the above, the macroeconomic situation is highly complex and presents an ambiguous picture when it comes to diagnosing the sources of the decline in investment.
The key issues of the impact of the Covid-19 pandemic on the economy and financial markets are described in my article below:
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In view of the above, I address the following question to the esteemed community of scientists and researchers:
What could be the factors of the demonstrated for the period of the last few quarters decline in the overall level of investment in the economy in a situation characterized, among others, by such factors of influence on economic processes as available various programs and instruments for external financing of economic activity, low inflation, low unemployment, normalized general economic, macroeconomic situation, etc.?
What could be the factors for the decline in the overall level of investment in the economy despite the available various instruments for external financing of economic activity, low inflation, normalized economic situation?
What do you think about this topic?
What is your opinion on this issue?
Please answer,
I invite everyone to join the discussion,
Thank you very much,
Best wishes,
Dariusz Prokopowicz
The above text is entirely my own work written by me on the basis of my research.
In writing this text, I did not use other sources or automatic text generation systems.
Copyright by Dariusz Prokopowicz
1. Fiscal policies may be introduced at odd times leading to inefficiency and low macroeconomic effects.
2. Constant deficit spending due to political incentives to policymakers. Reversing this is always an impossibility.
3. Overheated economy and inflation caused by massive public sector spending especially during festive periods.
4. Debts and deficits from certain fiscal policies for expansionary purposes.
5. Low spending by consumers due to doubts.
6. Reduced investments by businesses due to uncertainties.
7. Volatility of the currency.
Rise in taxes, fall in income, rise in interest, desire to save more, decrease in wealth, fall in future expected income
(S-I)+(T-G)=(X-M) In this macroeconomic equation the first parenthesis on the left side relate to the question. Theoretically what we have learned in the schools is that S=I. In practice this may not be the case. Generally speaking, the second parenthesis on the left represents the government`s deficit, meaning that taxes are not sufficient to fund the government expenditures and government borrows money from the public to balance it. If left side of the equation has a deficit that means the right side of the equation has a deficit too, meaning that imports exceed exports. That means there is a twin deficit in the economy which is hard to manage. We have assumed that the first parenthesis on the left side of the equation is zero. What if that it is also minus (investments exceed savings) meaning that country`s savings is not sufficient to invest. Then we have problem of triple deficit which is even worse that the twin deficit. There may be various reasons for the triple deficit. I.e. High inflation, people think that their purchasing power will decline if they save their money and increase their current demand on purchases. Investments are financed by external-out of the country sources attracted by high interest and low devaluation in the country. It is very hard to fix this situation. In order to fix it governments should take austerity measures and the public should agree with it.
1. Unstable frame work policy
2. Volatility in the foreign exchange rate
3. Uncertainty in financial prospects
4. Preference of savings and generating passive income
I think there are a couple of explanations for that. From a top-down perspective, one could argue that the decline in investments is the result of the change in the global macro backdrop particularly after the GFC, as the main driver of investments, namely growth / economic activity, has been replaced with global liquidity(thanks to QE).
Also, low, if not negative, rates might also have an impact as in an environment of declining return on investments (RoI), the focus switched to those projects that has the potential to offer high RoIs, such as start-ups, tech companies etc.
On top, the de-globalization trends and rising protectionism has curbed foreign direct investment flows, particularly in emerging markets, which negatively affect the investment prospects.
From a bottom-up perspective, I would argue that the decline in RoI is responsible. Given the low RoI levels, most of the corporates turned their focus to shareholders, and start offering share buybacks, or increasing their dividends etc.
Yes, innovation potential refers to a country's capacity to generate and implement new ideas, technologies, and other innovations that contribute to economic growth.