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

The economic performance of Poland in the first quarter 2000 was slightly worse than we expected. Although the growth rate of GDP was quite fast, some crucial indicators of the internal and external disequilibria did not improve. Relatively slow increase in exports, hampered by the strong zloty vis-à-vis euro, resulted in the further deterioration of the curent account figure. The deterioration took place despite the economic recovery in Western Europe that allowed for an excellent export performance in the other Central European countries. The CPI inflation rate stayed at a two-digit level, and the expectations remained high, raising fears about the ability of the central bank to meet the inflation target and forcing the Monetary Policy Council to raise interest rates. Finally, the unemployment increased to the levels not experienced since mid-1996, proving both the restructuring pressure that exists in the economy and the rigidity of the Polish labour market. All these factors make us more pessimistic about the future economic performance than we were three months ago. The growth rate in the last two quarters exceeded 6%, mainly due to the stable growth of the domestic absorption. However, the built-up of the disequilibria will result in a gradual slow-down of the GDP growth and the result for the whole year will be around 5.6%. Zloty, free floating since April 2000, will strengthen in the second half of the year. As a result, after a temporary improvement the dynamics of imports will exceed the dynamics of exports and the current account deficits will not fall below 7% of GDP. As the current path of growth is not sustainable over the longer run, given the high level of the external imbalances and a need for the appropriate policy response, the GDP growth will further slow down in 2001 to below 5%.

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

1. The rate of growth of the domestic absorption was slightly below 6%. The dynamics of the investment demand, albeit reduced in comparison with 1998, accelerated. The personal consumption growth was stable at ca.5%.

2. The improvement in the export performance was smaller than expected, despite the economic recovery in Western Europe. The relatively weak export performance, particularly if compared with the other Central European countries, was partly due to the flexible exchange rate policy that allowed for the 16-19% of the real appreciation of zloty vis-à-vis euro in the year to April. As the import dynamics was gradually rising together with the industrial recovery, and the terms of trade remained unfavourable, the current account deficit increased to the dangerously high level of 8% of GDP.

3. Altogether, GDP growth remained at the level above 6%. The domestic absorption marginally deccelerated, while the slight positive growth impact of the foreign trade continued.

4. Despite the relative strength of zloty, the CPI inflation rate stayed at a two-digit level and the inflationary expectations remained high. That raised fears about the ability of the central bank to meet the inflation target for the second year in the row and forced the Monetary Policy Council to raise interest rates. We still tend to assess that the fast inflation is a temporary phenomenon caused by accumulation of the unfavourable factors and therefore we expect the return of the disinflation trend, particularly in the second half of the year.

5. The fiscal performance during the first quarter of 2000 was relatively good. The built-up of the fiscal deficit to 50% of the all-year target is not worrying, given the timetable of the budget revenue and expenditure. A clear improvement was recorded in the social security system.

6. The unemployment rate increased to almost 14%, the level not experienced since mid-1996. That proves both the restructuring pressure that exists in the economy, strengthened by the real appreciation of zloty, and the rigidity of the Polish labour market. If not addressed by the appropriate medium-term structural policies, the high unemployment may be a serious setback for the further growth.

The outlook for the year 2000 is slightly positive, although we are less optimistic than three months ago, and again we issue a strong warning of the danger created by the excessive external imbalance. We expect zloty to strengthen seriously in the second half of the year, mainly due to the capital inflows connected with privatization, and given the flexible exchange rate policy of the central bank. Therefore, the trade gap is likely to fall during the first half of the year, but to increase again during the second half despite the positive growth outlook for the major trading partners. A high level of the current account deficit starts to create a danger for the economic stability, particularly in the light of the obvious lack of the adequate attention paid to the problem by the central bank. Together with the stable dynamics of the domestic absorption, that should lead to the GDP growth rates of ca.5.6% accompanied by the current account deficit of 7% of GDP. As this level of the deficit is not sustainable over the longer run, we expect the fiscal and monetary tightening in 2001, reducing the growth rate to below 5%. Our main conclusions about the likely outcome are as following:

1. The stable dynamics of the domestic absorption will lead to the continuously increasing dynamics of imports. The rates of growth of exports should pick up over the next two quarters, but fall again in the end of 2000 hampered by the strengthening zloty.

2. The strengthening of zloty, mainly due to the capital inflows connected with privatization, will not allow for the reduction of the current account deficit below 7% of GDP in 2000. Although the expected inflows of the long-term capital will secure the safe financing, the problems will aggravate in 2001-2002 forcing the further fiscal and monetary tightening.

3. The fiscal outcome of the year 2000 should be quite good, due to the economic growth and the consolidation of the public sector reforms. That will not be enough, however, to check the trend of the growing current account. The monetary policy will be concentrated on the inflation target, even at the expense of the high external imbalance. Therefore, and contrary to our previous views, we do not foresee any interest rate cuts in 2000.

3. Growth rate of the investment demand will pick up again to two-digit levels, leading to the accelerated retooling of the industry. Dynamics of consumption will remain stable at ca.5%.

4. GDP growth is likely to remain high, albeit gradually falling, during the whole 2000. We forecast the 2000 GDP increase at 5.6%. However, we expect that the unavoidable fiscal and monetary tightening will result in the slow-down of the GDP dynamics in 2001 below 5%.

Table 2 shows projected inflationary developments in the next quarters. We assess that the two-digit inflation in the first half of 2000 is mainly a temporary phenomenon caused by accumulation of the unfavourable factors, and we expect the disinflation trend to return in the second half of 2000. However, as the disinflation policy based on the strengthening of zloty is not sustainable over the longer run, serious problems in reducing inflation may arise in 2001. We expect the CPI inflation to reach ca.7% by the end of 2000, close to the inflation target, but to fall only marginally, by 1 per cent point, in 2001.

TABLE ONE. POLISH GDP pct change vs pvs period

 

Quarterly data and forecast

Yearly data and forecast

 

2000

2001

1999

2000

2001

 

Q1 (est.)

Q2

Q3

Q4

Q1

Q1-Q4

Q1-Q4 (est.)

Q1-Q4

                   

GDP Total

6.1

5.6

5.5

5.4

4.3

4.1

5.6

(6.1)

4.9

of which:

                 

Personal consumption

4.9

4.5

4.7

5.0

5.1

5.0

4.8

(5.6)

4.6

Government consumption

1.6

1.6

1.6

1.6

1.5

1.4

1.5

(1.6)

1.5

Gross fixed capital formation

8.4

9.5

10.2

10.1

9.2

6.9

9.8

(12.8)

9.5

                    

Exports

5.2

8.2

7.6

5.8

5.8

-1.4

6.7

(8.3)

7.5

Imports

4.6

5.3

5.7

8.5

8.4

2.0

6.3

(9.4)

8.4

                   

Memo items:

            

 

   

Current account as % of GDP

         

-7.6

-7.1

(-6.9)

-6.7

Trade deficit (balance of payments) as % of GDP

         

-10.4

-10.1

(-10.3)

-9.7

Budget deficit as % of GDP (excluding privatization)

 

 

 

 

 

-2.1

-1.8

(-1.8)

-1.3

                 

 

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

 

1999

2000

2001

 

Q4

Q1

Q2

Q3

Q4

 

Q1

 

 

       

 

 

12 months CPI inflation

9.8

10.3

9.9

8.2

7.0

(6.1)

6.5

12 months PPI inflation

8.1

7.4

7.2

5.8

4.4

(4.5)

4.5

 

             

Memo items:

 

 

 

 

 

 

 

Zloty/US$ exchange rate (eop)

4.17

4.09

4.26

4.19

4.18

(4.07)

4.09

Zloty/Euro exchange rate (eop)

4.22

3.95

4.12

4.10

4.13

(4.44)

4.12

Lombard rate

20.5

21.5

21.5

21.5

21.5

(16.0)

20.5

 

 

 

         

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

Source: NOBE Independent Center for Economic Studies