Quarterly forecasts of the economic development of Poland (October 2000)
[This forecast was prepared for and is published courtesy of Reuters Polska.]

The third quarter of 2000 was marked by a surprisingly poor performance of the Polish economy. The growth rate of GDP decelerated to ca.4% due to the low dynamics of the domestic absorption, while inflation soared. This, in turn, was a result of the negative supply shock (raise in food and oil prices) not properly addressed by the government, and combined with the tightened monetary policy. The monetary tightening, albeit ineffective in securing achievement of the short-term inflation target, was a natural consequence of the falling credibility of the fiscal and structural policy of the government. The only good news came from the external sector: exports were increasing fast, mainly due to the good external environment, while the dynamics of imports remained relatively low due to the slow growth of investment and consumption. The insufficient policy adjustment in response to the supply shocks, the inappropriate policy mix biased towards the excessively tight monetary policy and the growing clouds over the medium-term fiscal and structural policy – mainly due to the political agenda, made us more pessimistic about the medium-term economic performance of Poland. The built-up of the external imbalance will be checked at the expense of the GDP growth, and mainly the slow increase of the investment demand. That, in turn, will lead to a more balanced economy with the lower inflation and lower current account deficit, but with the registered unemployment of almost 16% and GDP growing at the rate lower than 5%.

The economic growth in the third quarter of 2000 was characterized by the following factors:

1. The rate of growth of the domestic absorption slowed down to 2%. This was a result of the negative supply shock, not properly addressed by the government, that eroded the real personal income and lead to the slowdown in the consumer demand. Low dynamics of the consumer expenditure was combined with the tightened monetary policy leading to lower dynamics of investment.
2. As a result of the undecided behaviour of the government vis-ŕ-vis external shocks, and the growing doubts about the willingness of the government to pursue tighter medium-term fiscal and structural policy, the policy mix shifted further towards the excessively tight monetary policy. Nevertheless, the hike in interest rates was insufficient to secure achievement of the short-term inflation target, mainly due to the lack of support from the trade liberalization moves.
3. The external balance of the economy started to improve, as the fast increase in exports was accompanied by the relatively low import demand. However, the improvement was achieved in a way that seems to be the most expensive one for the economy: through the reduction of the investment demand.
4. Altogether, as a result of the slow increase of the domestic absorption combined with the strong positive growth contribution from the net exports the growth rate of GDP lowered to ca. 4%. At the current level of inflexibility of the labour market such a GDP dynamics led to the increase in the unemployment rate to 14%.

The outlook for the last quarter of 2000 and for 2001 looks rather gloomy and worse than we previously expected. The unfavourable policy mix will lead to continuation of the low investment demand, reducing the current growth rate of GDP and slowing down the process of modernization of the economy. However, an improvement in the fiscal policy is quite improbable, given the political agenda (general elections due in 2001). In the absence of a tighter fiscal policy we consider it very unlikely that the Monetary Policy Council cuts the nominal rates before the mid-2001, even if a slowly falling inflation leads to the increase in the real interest rates. The stable, but relatively low dynamics of the domestic absorption, combined with the weakening positive growth contribution of the net exports should lead to the GDP growth rate of ca.4.6% in 2001, accompanied by the current account deficit of 6% of GDP. Despite some improvement in the balance of payments the position of złoty will remain quite vulnerable. We expect some depreciation in 2001, mainly due to the smaller capital inflows discouraged by the growing risk of economic and political instability.

The dynamics of inflation, after a peak in the summer of 2000, should gradually fall. We expect the CPI inflation to reach slightly below 9% by the end of 2000 and below 7% by the end of 2001. That will finally create some place for the real interest rates cuts in the second half of 2001. The biggest worry is the rising unemployment that we project at almost 15% by the end of 2000 and growing by one more point during 2001. Only a radical deregulation of the labour market could stop the process. Unfortunately, we do not think that such a move is likely to happen in 2001, mainly due to the resistance of the trade unions (playing an important role both on the left and right wing of the political stage).