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