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Quarterly forecasts of the economic development of Poland (November 2002)

European Union: a crucial factor1

Economic outcome of the first three quarters of 2002 was close to our expectations. After bottoming up during the first half of the year, during the third quarter the economy started to show first signs of the acceleration. Up to now, it is mainly due to the fact that the low base effect started to influence the yearly growth rates of the output and, especially, of the investment demand. This effect - that should be, at least partly, seen as a statistical deficiency - will continue and may lead in November-January to very high rates of growth of the industrial output. However, these rates may be misleading: the real economy will remain rather week, mainly due to the weak domestic demand. The weak real economy is, and will remain accompanied by the strong currency, low inflation and stable current account deficit. The basic reason for this is that, over the next few quarters, we do not expect any dramatic improvement in the factors that led to the current slowdown. The policy mix, albeit considerably improved compared to the status from a year ago, is still far from being optimal. Prospects of the external demand remain bleak, mainly due to the expected continuation of the stagnation in Germany. Firms's assessment of the general economic environment will remain rather negative, mainly due to the perceived slow progress in structural reforms. That, in turn, will lead to the rather slow rebuilt of the investment demand. On the other hand, the general assessment of the economic prospects will be improved by the expected conclusion of the Poland's EU accession negotiations.

Albeit we do not expect any radical improvement, our general outlook for the coming four quarters starts to be cautiously optimistic. We are likely to see a gradual acceleration of the seasonally adjusted domestic demand and output. Despite the unfriendly external environment, we expect continuation of the modest export expansion. At a certain moment, however, the trend of the improvement in the current account is likely to be reversed, as the improving domestic demand is likely to lead to higher imports. However, the deterioration of the current account is not likely to be significant. The policy mix will improve only slightly. Albeit we do not expect problems with execution of the 2003 budget, in our view the fiscal policy will not improve significantly, and will remain overly loose. Moreover, we do not expect any improvement in 2004 neither due to short-term budgetary problems connected with the accession to the EU. The monetary policy will remain rather stable, with the real interest rates going down slightly due to the expected modest increase in the inflation rate.

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, prospects of the EU accession, and the general improvement in the business confidence. That should also lead to the gradual increase in the FDI inflows.
  3. 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. Therefore, we project the Polish current account deficit to increase slightly, in line with the growing FDI inflows.
Altogether, the year 2003 will be a year of the slow improvement in the real economy, accompanied by a continuously strong currency and low inflation. The coming quarters should be seen as the preparatory period for the EU accession. Over time, this factor will be strengthening its role in shaping the economic policies, the sentiments of the markets, the capital movements, and the strength of the currency.

TABLE ONE. POLISH GDP - pct change vs pvs period

Quarterly data and forecast

Yearly data and forecast

2002

2003

2002

2003

Q3 (est.)

Q4

Q1

Q2

Q3

Q1-Q4

Q1-Q4

GDP Total

1.1

2.1

2.8

3.1

3.2

1.2

(1.1)

3.4

(3.7)

of which:

Personal consumption

2.1

2.6

2.7

2.5

2.6

2.5

(2.7)

2.6

(2.7)

Government consumption

0.4

0.9

1.1

1.0

0.9

1.0

(1.1)

1.1

(1.1)

Gross fixed capital formation

-2.5

2.6

4.7

7.5

8.3

-2.7

(-1.0)

6.9

(7.1)

Exports

3.3

3.6

4.9

5.1

5.0

3.8

(1.1)

5.6

(7.0)

Imports

3.1

4.6

5.7

6.8

6.9

3.1

(3.5)

6.6

(6.8)

Memo items:

Current account as % of GDP

-3.8%

(-4.3%)

-4.3%

 -4.8%

Registered unemployment as % of labour supply

17.6

18.0

18.1

18.1

20.4

17.9

18.0

(19.4)

17.8

(18.9)

Budget deficit as % of GDP (excluding privatization)

-5.0%

(-5.0%)

-4.7%

 -4.4%

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


TABLE TWO. CPI, PPI INFLATION

Data

Forecast

2002

2003

Q2

Q3

Q4

Q1

Q2

Q3

Q4

12 months CPI inflation

1.6

1.3

1.6

(2.9)

1.8

2.1

3.2

3.9

(4.2)

12 months PPI inflation

1.2

1.1

1.8

(1.9)

1.8

1.7

1.7

1.7

(1.6)

Memo items:

Zloty/US$ exchange rate (eop)

4.02

4.15

4.20

(4.29)

4.21

4.26

4.24

4.24

(4.25)

Zloty/Euro exchange rate (eop)

3.85

4.07

4.06

(4.12)

4.09

4.12

4.18

4.19

(4.23)

Lombard rate

11.5

8.75

8.50

(11.0)

8.50

8.50

8.75

9.0

(11.5)

NOTE: Figures for end of period; previous estimate in brackets.

Source: NOBE Independent Center for Economic Studies
1 This text is based on the forecast prepared by the Independent Center for Economic Studies (NOBE) for Reuters Polska. NOBE is an independent economic institute specialized in short and long-term forecasts and analysis of the economic development of Poland. For quotations please refer to the NOBE forecast for Reuters Polska. For queries NOBE fax number is (48 42) 656 49 78