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Quarterly forecasts of the economic development of Poland (October 2001)
[This forecast was prepared for and is published courtesy of Reuters Polska.]

Economic developments during the third quarter of 2001 made a risk of the recession bigger. Firstly, the external environment for the Polish economy seriously deteriorated, as the world economy suffered a major slow-down accompanied by adverse effects of the terrorist attack against the USA. Secondly, the fiscal crisis in Poland appeared much more serious that previously feared. Thirdly, the unclear political and economic situation did not allow the central bank to relax the monetary policy. Fourthly, the contraction of the investment demand appeared deeper than we previously assumed. Therefore, Poland enters a very dangerous period during which a tough fiscal adjustment program, necessary to stabilize the budget and to rebuild the confidence of the financial markets, will be most likely realized in the conditions of the shrinking tax base, falling dynamics of exports, and lack of sufficient cooperation and support from the monetary authority. The negative short-term effects of the major fiscal tightening are not likely to be compensated neither by the monetary expansion nor by the export boom. Therefore, the growth prospects for the domestic absorption and GDP look very bleak. According to our view, Poland may avoid the contraction of output, but the growth in the next year is unlikely to exceed 1-1.5%, with the unemployment growing to almost 20%. On the other hand, we expect that the strength of the Zloty, currently on the unsustainable level, will be corrected by the market. A weaker currency will not help a lot exporters, but will make the achievement of the medium-term monetary policy target of 4% CPI inflation in 2003 all but impossible..

Two positive factors that should be noted include the likely acceleration of the negotiations with the EU, making the accession as early as 2004 quite possible, and further decrease of the current account deficit. Both phenomena, however, will have a medium-term meaning and will not help Poland to cope with the current economic problems in 2002.

The economic growth in the first three quarters of 2001 was characterized by the following factors:

1. The domestic absorption contracted, mainly due to the sharp fall in investment activities. In our view, such a slowdown can not be explained just by the high level of real interest rates, but reflects also the growing uncertainty about the medium-term development prospects, and about the social and economic stability, that led to the slowdown in both the domestic and foreign investment. Therefore, rebuilding the confidence of the markets is the first task of the new government.
2. The improvement in the balance of payments continued, with the current account deficit going down to below 5% of GDP. Obviously, under the exchange rate regime of the pure float such a decrease is just a reflection of the slowdown in capital inflows. However, one should also note the remarkable export performance of the Polish firms, and a sharp deceleration of the demand for imports.
3. The real exchange rate of the Zloty remained at a very high level. A phenomenon of the weak real economy and strong currency can be explained by the adverse effects of the macroeconomic policy mix, with the loose fiscal policy and overly tight monetary policy. Extremely high real interest rates still attract the portfolio capital, although the growing risk makes the horizon for investment shorter.
4. The fiscal crisis continued, with no adequate reaction of the former government. Delay in the fiscal adjustment program enhanced the general uncertainty about the financial stability of Poland.

The outlook for 2001 looks rather gloomy. The unfavourable policy mix, in particular the restrictive monetary policy accompanying the fiscal tightening will lead to continuation of the low investment demand, reducing the growth rate of GDP to ca. 1% in the first half of 2002. The disinflation process, quite remarkable in 2001, will be probably temporarily reversed by the serious devaluation of the currency. We expect that Zloty may lose as much as 15% of its value vis-ŕ-vis the major world currencies during the first half of 2002. The biggest worry, however, will be unemployment growing to almost 20% by the end of the year, even if some acceleration of the GDP growth appears.