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Quarterly forecasts of the economic development of Poland (July 2002)
[This forecast was prepared for and is published courtesy of Reuters Polska.]

Economic outcome of the first half of 2002 was slightly better than we previously forecasted, mainly due to the better than expected export performance. However, the general picture was very close to our projections: the real economy was very week, mainly due to the weak domestic demand, inflation remained fully under control, and the current account deficit did not change significantly. Starting from April, the mild process of the correction of the Zloty exchange rate took place (until July Złoty lost ca. 10% of its value vis-à-vis the basket of currencies). Such a weakening, fully in line with our expectations, should not seriously influence the inflationary pressure being offset by very low prices of food and fuels.

We maintain our view that the Polish economy probably bottomed up during the second quarter of 2002, and the growth should significantly accelerate over the next 4 quarters. Initially, the accelerated growth will result mainly from the low base effect – the deep fall of the investment demand, causing the economic slowdown, started only during the second quarter of 2001, and continued throughout 4-5 quarters. However, we tend to believe that over the next quarters the low base effect will be gradually substituted by the actual economic growth, steadily pushing the GDP growth figures up. Several factors should contribute to this effect:

1. Personal consumption remains relatively strong, fuelled – despite the high unemployment – by steadily growing real wages. During the months to come we also expect the higher dynamics of the capital income of households, accompanying the faster growth of output and rising corporate profits.
2. Some early signals indicate the possible acceleration of the investment demand. This factor is absolutely crucial for the growth prospects of Poland, as it is mainly the fall of investment demand that caused the economic slow-down of the country. Among reasons behind the projected acceleration one should note: the lagged effect of the interest rates cuts, progress in the fiscal stabilization, fast advancement in the EU accession negotiations, and the general improvement in the business confidence. That should also lead to the gradual increase in the FDI inflows.
3. The growth of the government consumption will remain relatively slow, albeit faster than we previously expected. In our view, additional budgetary expenditures on the support for loss-making firms will be quite limited, and will not significantly alter the path of the fiscal stabilization as proposed by the previous Finance Minister Marek Belka.
4. The external sector should not influence seriously the GDP growth. Rising dynamics of the domestic demand, and particularly investment, should lead to the acceleration of imports. Given poor (still) prospects of the recovery in Germany, we do not expect the export performance to match the growth of imports despite the weaker currency. Exports will accelerate only during the year 2003. Therefore, we project the Polish current account deficit to increase slightly, in line with the growing FDI inflows.

Altogether, we expect the GDP growth to increase gradually to ca. 3% during the first half of 2002. The further acceleration of the growth will be probably accompanied by the apparent increase in the current account deficit, and rising inflationary pressure. However, both phenomena should not reach dangerous levels and most likely will not lead to tightening of the macroeconomic policy in 2003.

The inflation rate is likely to grow again over the next few quarters. The unusually low level of consumer prices recorded during summer 2002 does not seem to be sustainable if the domestic demand accelerates. Also the effects of the weaker Złoty should be visible in a few months time. Nevertheless, unless some unexpected increase in the world fuel prices occur, the general CPI index should remain lower in the second half of 2002 than we previously expected.