[This forecast was prepared for and is published courtesy of Reuters Polska.] Economic developments during the first quarter of 2001 were very close to what we expected. The economy was in the state of serious slowdown, due to the sluggish domestic demand. The good export performance continued, leading, together with the much slower growth of demand for imports, to the continuous improvement in the balance of payments. The fall of the current account deficit below 6% of GDP, down from 8.3% 12 months ago, seriously reduced any risk of the foreign exchange crisis. Despite the progress in stabilization of the economy, NBP was very reluctant in cutting interest rates (the cuts in real interest rates were only slightly deeper then we forecasted). High interest rates, in turn, contributed to the slow growth, and created incentives for the enhanced portfolio capital inflows, leading to strengthening of Zloty. The inflationary pressure eased and disinflation trend returned, partly due to the very strong Zloty, and partly due to the weak domestic demand. Some indicator suggest that the domestic demand growth bottomed down during the fourth quarter of 2000 and first quarter of 2001. Raising real demand for credit, some pickup in real wages, and expected transfer payments from the government should contribute to the faster growth of expenditures in the second half of the year. Nevertheless, the macroeconomic policy faces serious challenges. The budget deficit is likely to exceed the 2001 target, mainly due to the revenue shortfall caused by the economic slowdown. That makes deep interest rates cuts quite unlikely, despite the excessive tightness of the monetary policy. Strong Zloty and deteriorating external environment will probably lead to the slowdown in export expansion. With the moderate pickup in the import demand that should lead the current account improvement to the halt. The economic slowdown may become longer and more profound than we previously assumed. The GDP growth rate will not exceed 5% level before 2003, and the unemployment will reach at least 17%. The economic growth in the first quarter of 2001 was characterized by the following factors:
The outlook for 2001 looks rather gloomy. The unfavourable policy mix, in particular the excessively restrictive monetary policy will lead to continuation of the low investment demand, reducing the growth rate of GDP to below 4% in 2001 and slowing down the process of modernization of the economy. However, as the political agenda makes an improvement in the fiscal policy quite improbable neither in 2001 nor in 2002, the Monetary Policy Council will be quite reluctant in cutting the nominal rates. The biggest worry is the rising unemployment that we project at over 17% at the beginning of 2002 Only a radical deregulation of the labour market could stop the process. Unfortunately, given the political agenda, we do not think that such a move is likely to happen in 2001. The improvement in the external equilibrium will come to the end by the mid-2001, and the current account deficit will stabilize between 5.5 and 6% of GDP. That will be mainly due to the strong Złoty, a product of the stabilization of the economy, high interest rates and the flexible exchange rate regime. In our view, Złoty is currently overvaluated by 10-15% vis-à-vis euro. However, we do not expect the accelerated depreciation before 2002. The CPI inflation rate, after a spectacular fall in the first quarter, should stabilize or even increase in the second quarter. The rate should fall again to ca. 5.5% during the summer of 2001, as a result of low food prices, strong currency, and weak domestic demand. However, we expect the further progress in disinflation very difficult, particularly if Złoty significantly depreciates in 2002.
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