NOBE Independent Center for Economic Studies

Quarterly forecasts of the economic development of Poland

As expected, the economic growth accelerated during the third quarter. The GDP rate of growth increased to ca. 4%, fuelled by continuously good export performance combined with the improving investment demand. We estimate that the investment demand has just turned back into the black after nine consecutive quarters of the decline. On the one hand, such a change is a normal result of the turning point in the business cycle. On the other hand, however, it also shows improving investment climate in Poland and the effects of the more relaxed macroeconomic policy. We expect the revival to continue over the quarters to come, with the foreign demand gradually replaced by the domestic demand as the main engine of the growth. However, with the macroeconomic policy (particularly fiscal) still unfavorably perceived by the market, lagging structural reforms, poor investment image and the increasing political risk, we hesitate to forecast any radical improvement in the domestic and foreign investment. Therefore, we do not see growth rates of GDP to reach 5-6%, in the medium term as assumed by the government, but rather to stabilize at ca. 4-4.5%. Such a growth, although higher than in neighboring countries, will not lead neither to the considerable fall in unemployment nor to the radical improvement in the perceived investment image of Poland. It means the real convergence vis-a-vis Western Europe is going to re-emerge, albeit at a relatively slow path.

In our view, at this stage of the economic revival the acceleration of the GDP growth is not likely to bring about any serious increase in the macroeconomic disequilibria. Nevertheless, the observed rate of CPI inflation is likely to increase to 2-3%, as some of the one-time factors pushing the prices down gradually evaporate. The current account deficit is also likely to increase over 3% of GDP once only the higher investment demand brings about higher imports of the capital goods. As the current account declined during the period of the slowdown to very low levels (currently 2.7%), we do not see any danger in such an increase.

The fiscal policy, and particularly the budget for 2004, is currently in the centre of interest of the markets. We share views that the size of the deficit is excessive and makes it quite improbable that Poland avoids, over the next few years, breaking the constitutional barrier of the 60% maximal public debt to GDP ratio. However, we argue that the fiscal problems of Poland represent a structural rather than the short-term macroeconomic issue. Albeit the deficit is high we do not see treats of any major macroeconomic instability. The deficit can be financed on the market, although probably at the higher cost than today, and Poland is far away from any risk of falling into the debt trap. Moreover, the problem of high deficits is shared by the Central European neighbours of Poland, including the Czech Republic and Hungary, therefore countries dealing with the problem of the excessive pressure for strengthening rather than weakening of their currencies. The constitutional issue is likely to disappear once Poland adopts the European methodology for measuring the public debt, that is likely to reduce the dept to GDP ratio by almost 10 percentage points due to the inclusion of the net assets of the semi-public pension scheme. Despite the lack of the imminent macroeconomic risk, the Polish public sector faces serious challenges of the long-term stability and ability to fulfil the EMU criteria. These challenges must be addressed by the radical structural reforms of the public sector. For the time being, the government’s plans – known as the Hausner plan – deal only with the reforms of the social transfers. Not only must they be fully implemented, but they should be accompanied by equally difficult reforms of the public administration, health service, education, taxation, and dealing with the state-owned enterprises. We tend to believe that these reforms will not be implemented by the current government. On the contrary, we expect the majority of the Hausner plan to be accepted despite the widespread public discontent. Altogether, we expect the continuation of the excessive deficits policy over the next years, combined with the gradual implementation of the most needed structural reforms.

Altogether, we forecast the following developments for the next 4 quarters:
  1. 1. In the short run, we expect the growth of investment demand accelerating to 8%. We also expect some improvement in the FDI inflows even before the formal accession to the European Union in May 2004.
  2. 2. Growing investment, together with the stable increase of the consumption, will secure the acceleration of the domestic demand. That should lead to the GDP growth of ca.3.5% in 2003 and well over 4% in 2004.
  3. 3. We do not see treats for the short-term sustainability of the growth. The big demand gap should help to keep the disequilibria under control. The wage demands will be restricted by the high unemployment, while the stable currency will lead to the low increase in industrial prices.
  4. 4. The outlook for the medium term looks slightly worse, as we do not expect big progress in the structural reforms over the next 2 years, partly due to the political cycle (the general elections are scheduled for the autumn of 2005). Therefore, we do not share the optimistic views of the government that the process of accelerating output dynamics will continue for a few years, and expect the growth to stabilize in the medium run at ca. 4-4.5%. On the one hand, such an output dynamics will allow for the control of the internal and external disequilibrium, thus allowing for maintaining the low inflation and safe levels of the current account deficit. On the other hand, however, such a growth will not be enough to allow for a significant fall of unemployment.
The period of the major slowdown of the Polish economy is over. However, unfinished structural reforms are likely to limit the scale of the economic rebound below the potential level. We expect Poland to enter the path of the moderate GDP growth, with the disequilibria under control, and high unemployment.

TABLE ONE. POLISH GDP – pct change vs pvs period
  Quarterly data and forecast Yearly data and forecast
  2003 2004 2003 2004
  Q3 Q4 Q1 Q2 Q3 Q1-Q4 Q1-Q4
GDP Total 4.0 4.1 4.1 4.2 4.3 3.5 (3.4) 4.3 (4.3)  
of which:  
Personal consumption 3.6 2.9 3.6 3.6 3.7 2.9 (2.2) 3.6 (3.3)  
Government consumption -0.2 0.0 1.0 1.2 1.5 -0.2 (0.7) 1.2 (0.7)  
Gross fixed capital formation 1.2 6.5 7.5 8.1 8.4 1.8 (3.5) 8.1 (7.9)  
Exports 9.1 7.9 7.4 7.2 6.8 8.1 (8.3) 7.1 (6.6)  
Imports 4.5 5.2 5.4 6.1 6.5 4.5 (5.4) 6.3 (8.3)  
Memo items:  
Current account as % of GDP   -2.9% (-3.2%) -3.1% (-3.8%)  
Registered unemployment as % of labour supply 17.8 (18.0) 17.3 (17.4)  
Budget deficit as % of GDP (excluding privatization)   -4.6% (-4.7%) -6.3% (-5.2)%  
NOTE: Growth rates presented measure GDP growth in quarters in relation to corresponding figures noted year ago. The column Q1-Q4 is an estimate for a calendar year; previous estimate in brackets.
Source: NOBE Independent Center for Economic Studies



  2003 2004
  Q3 Q4 Q1 Q2 Q3 Q4
12 months CPI inflation 0.9 2.2 (2.7) 2.2 2.3 2,9 3.1
12 months PPI inflation 1.9 2.0 (1.9) 1.7 1.8 1.9 1.9
Memo items:  
Zloty/US$ exchange rate (eop) 3.98 3.97 (3.78) 3.97 3.92 3.96 3.96
Zloty/Euro exchange rate (eop) 4.47 4.59 (4.35) 4.57 4.55 4.55 4.52
Lombard rate 6,75 6.50 (6.50) 5.00 5.00 5.00 5.00
NOTE: Figures for end of period; previous estimate in brackets.
Source: NOBE Independent Center for Economic Studies