Quarterly forecasts of the economic development of Poland
(July 2000)
[This forecast was prepared for and is published courtesy of Reuters Polska.]The economic performance of Poland in the first half of 2000 improved, mainly due to the more favorable external environment. With the stable dynamics of the domestic absorption, the fast recovery of exports led to the GDP growth of around 6%. Growth rates of exports reached impressive levels, mainly due to the increasing West European import demand. Even more importantly, the improvement in the export performance finally started to translate into the clear improvement of the balance of payments, reducing worries about the short- and medium-term stability of the economy. However, these generally positive factors were accompanied by some less favorable events. After the political turmoil and the break apart of the ruling coalition, doubts started to arise about the ability of the government to continue the necessary fiscal tightening in 2001. High inflation, fuelled mainly by the growing prices of food and gasoline, once again made unlikely that the end-of-year inflation target can be achieved. Although, for the time being, the central bank did not react to the picking up of inflationary expectations, the discrepancy between the ambitious disinflation plans and the real abilities to control the inflation becomes dangerously wide. As the practical prospects for the further monetary tightening are rather weak, and the fiscal policy will probably not improve in the next year, the current account problem will remain unsolved. After the improvement caused by the rapid export expansion the tensions will
start to rise again. Therefore, although the growth prospects for the coming quarters look well, in the longer run the growing saving-investment disequilibria will require the macroeconomic policy action and may also lead to the serious downwards adjustment of the exchange rate.The economic growth in the first half of 2000 was characterized by the following factors:
1. The rate of growth of the domestic absorption was around 5%. The dynamics of the investment demand remains reduced in comparison with the previous years. The personal consumption growth was stable at ca.4.5%.
2. Finally, Poland noted the significant improvement in the export performance, mainly due to the economic recovery in Western Europe. Although złoty still remained very strong vis-à-vis Euro, the growing foreign demand led to the very high dynamics of exports. The improvement in the export performance started to translate into the improvement of the balance of payments, reducing worries about the short- and medium-term stability of the economy. The 12-months current account started to shrink in the second quarter of 2000, for the first time since the Russian financial crisis, falling below the dangerous level of 8% of GDP.
3. Altogether, GDP growth remained at the level of ca. 6%. The domestic absorption marginally decelerated, while the positive growth impact of the foreign trade continued.
4. Despite the relative strength of zloty vis-à-vis Euro, the CPI inflation rate stayed at a two-digit level and the inflationary expectations remained high. The surge in inflationary expectations was due to the combination of several factors: high world prices of oil, strong dollar, raising domestic food prices, and the political instability. Meeting the inflation target of the central bank is generally considered unfeasible, even if a radical increase of the interest rates took place. Such an increase is, however, quite unlikely, and the discrepancy between the ambitious disinflation plans and the real abilities to control the inflation becomes dangerously wide. Despite these worries, we expect the return of the slow disinflation trend in the second half of the year if only the growth of the food prices is checked by the appropriate trade policies (increased duty-free import quotas for cereals).
5.· The fiscal performance during the first half of 2000 was relatively good. However, the doubts about the determination of the government to continue the necessary fiscal tightening are growing. The budget proposal for 2001, although showing a relatively small deficit, is less radical than the previous one presented by Mr.Balcerowicz. Moreover, its feasibility crucially depends on the success of the sale of the UMTS (mobile phone) licenses and on the proposed increase in the VAT rates. The political events, including the presidential and the general elections scheduled for 2000 and 2001, may create the additional pressure for increasing spending and the public sector deficit.
6.· The unemployment rate stayed at the level above 13%, 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 labor 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 second half of 2000 is rather positive, although the relief may appear to be only temporary. We expect zloty to strengthen 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. Despite this, the continuing export expansion will help in reducing the current account deficit. However, in the second half of 2000 and during 2001 the dynamics of imports will start to match these of exports. Together with the stable dynamics of the domestic absorption, that should lead to the GDP growth rates of ca.5.4% in 2000, accompanied by the current account deficit of 7% of GDP, and to the slightly slower growth and deficit in 2001. Despite our previous expectations the fiscal and monetary policies are not likely to be tightened in 2001, leaving the current account problem unsolved. 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 remain high.
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 calling for the appropriate policy response and probably leading to some downward adjustment of the exchange rate.
3.· The fiscal outcome of the year 2000 should be quite good, due to the economic growth, high inflation, and the consolidation of the public sector reforms. However, the prospects for 2001 look much less favorable, partly due to the political reasons. As far as the monetary policy is concerned, we do not foresee any interest rate change until the end of 2000.
4. GDP growth is likely to remain high, albeit gradually falling, during the whole 2000. We forecast the 2000 GDP increase at 5.4%, and slightly less in 2001.
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 unfavorable factors, and we expect the relatively weak disinflation trend to return in the second half of 2000. The CPI inflation should reach ca.8% by the end of 2000. We expect, however, growing troubles with the disinflationary policy in 2001-2002, particularly if the exchange rate adjustment takes place.
TABLE ONE. POLISH GDP – pct change vs pvs period
Quarterly data and forecast
Yearly data and forecast
2000
2001
1999
2000
2001
Q2 (est.)
Q3
Q4
Q1
Q2
Q1-Q4
Q1-Q4 (est.)
Q1-Q4
GDP Total
5.8
4.7
5.1
5.0
5.2
4.1
5.4
(5.6)
5.2
of which:
Personal consumption
4.5
4.4
4.9
5.1
5.1
5.0
4.6
(4.8)
4.9
Government consumption
1.0
1.0
1.0
1.2
1.2
1.4
1.0
(1.5)
1.2
Gross fixed capital formation
6.9
9.5
8.6
9.0
9.1
6.9
8.1
(9.8)
9.0
Exports
16.9
10.7
10.0
10.0
8.6
-1.5
13.8
(6.7)
9.2
Imports
10.6
11.2
11.5
9.8
9.9
1.9
11.5
(6.3)
9.0
Memo items:
Current account as % of GDP
-7.6
-7.3
(-7.1)
-6.5
Trade deficit (balance of payments) as % of GDP
-10.4
-10.3
(-10.1)
-9.4
Budget deficit as % of GDP (excluding privatization)
-2.0
-1.9
(-1.8)
-1.6
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
2000
2001
Q1
Q2
Q3
Q4
Q1
Q2
12 months CPI inflation
10.3
10.2
9.3
7.9
(7.0)
7.4
6.8
12 months PPI inflation
7.3
8.8
6.5
5.3
(4.4)
4.4
4.4
Memo items:
Zloty/US$ exchange rate (eop)
4.09
4.40
4.32
4.31
(4.18)
4.38
4.35
Zloty/Euro exchange rate (eop)
3.95
4.17
4.23
4.34
(4.13)
4.45
4.50
Lombard rate
21.5
21.5
21.5
21.5
(21.5)
20.5
20.5
NOTE: Figures for end of period; previous estimate in brackets.
Source: NOBE Independent Center for Economic Studies
