Quarterly forecasts of the economic development of Poland  (January 2001)
[This forecast was prepared for and is published courtesy of Reuters Polska.]

The fourth quarter of 2000 gave mixed signals from the economy. On the one hand, the economic growth was slower than expected, due to the very weak domestic demand. On the other hand, the export performance was excellent, leading – together with much slower growth of imports – to sharper than expected improvement in the balance of payments. The inflationary pressure eased as well, with surprisingly fast disinflation in two last months of 2000. On the average, the observed economic trends suggest that the macroeconomic policy aimed at stabilizing the economy, first of all through the reduction of the excessive current account deficit, did succeed. Not only has the risk of a foreign exchange crisis already been seriously reduced, but the economy entered, at least for a certain period, a path of the further reduction of the external disequilibria. Unfortunately, as the main burden of adjustment was put on the monetary policy, with an inadequate support given by the fiscal policy, the policy mix was far from optimal. The interest rates policy was far too tight, while the fiscal policy too loose, to avoid a serious slowdown in the investment demand. In other words, the problem of imbalance between the domestic saving and investment needs, leading to the current account deficit, was solved not by increase in domestic saving, but rather by the deceleration of investment. Given the mixed signals about the 2001 budget, and some discouraging remarks of the leaders of the SLD, likely winner of the end of the year elections, suggesting a possible fiscal loosening in 2002, the Monetary Policy Council is likely to be very hesitant in cutting interest rates. Even if the fiscal loosening scenario does not realize, maintaining the monetary policy bias towards high interest rates is quite likely throughout the majority of 2001. That, in turn, will make the economic slowdown longer and more profound than we previously assumed. The GDP growth rate will not approach a 5% level before the end of 2001, leading to the unemployment of at least 16%. The slow growth, however, will be accompanied by a further improvement of the balance of payments, with the current account deficit falling from 6.3% of GDP in 2000 to 5.4% in 2001, and by the lower inflationary pressure, partly due to the stronger złoty.

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

1. The rate of growth of the domestic absorption slowed down to 0.4%. This was a result of the strong slowdown in the consumer demand, eroded by adverse price shocks, and by a fall of investment resulting from the tight monetary policy.
2. As a result of the undecided behavior of the government and mixed signals about the fiscal plans for 2001, the central bank maintained its bias towards high interest rates, and the policy mix shifted further towards the excessively tight monetary policy.
3. The external balance of the economy sharply improved, 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. 2.3%. At the current level of inflexibility of the labor market such a GDP dynamics led to the further increase in the unemployment rate to 15%.

The outlook for 2001 looks rather gloomy and worse than we previously expected. The unfavorable 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. Therefore, the economic slowdown will be longer and deeper than expected. As the political agenda makes an improvement in the fiscal policy quite improbable neither in 2001 nor in 2002, the Monetary Policy Council will be quite hesitant in cutting the nominal rates. Together with a slowly falling inflation that may lead to maintaining, or event to some temporary increase in the real interest rates. The stable, but relatively low dynamics of the domestic absorption, combined with the continuing positive growth contribution of the net exports should lead to the GDP growth rate of ca.4.2% in 2001, accompanied by the current account deficit of 5.4% of GDP. The remarkable strengthening of the złoty recorded in the last months of 2000 is likely to continue, given the current account improvement.

The dynamics of inflation, after a peak in the summer of 2000, should gradually fall to the level of 5-6% by the summer of 2001. In particular, that will be an effect of low food prices combined with the low rate of depreciation of złoty against the US dollar (partly due to the stronger than we previously projected strengthening of euro against dollar). However, we expect the CPI inflation to stabilize at the level of 6% for several quarters. Falling inflation together with the shrinking current account deficit 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 ca.16.5% by the end of 2001. Only a radical deregulation of the labor market could stop the process. Unfortunately, given the political agenda, we do not think that such a move is likely to happen in 2001.