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The Warsaw Voice » Other » May 28, 2008
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Robust Growth
May 28, 2008 By Andrzej Ratajczyk   
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The Polish economy is expected to slow down a little this year, but the country's GDP will still likely grow at a rate almost three times as fast as in the European Union as a whole.

The past two years were an excellent period for the Polish economy. GDP growth reached 6.2 percent in 2006 and 6.5 percent in 2007. While Poland is unlikely to maintain such impressive momentum this year, its economic growth should continue to run at a high level, economists say. What is especially important, the expected economic slowdown will be primarily due to a slowdown in the global economy rather than domestic problems, experts say. Forecasts for the world economy are not the best; in April the International Monetary Fund (IMF) revised downward its projection for global economic growth this year from 4.1 percent to 3.7 percent.

The IMF warns in its latest report that Europe will feel the effects of the global slowdown, coupled with growing prices of raw materials and a crisis on financial markets. The report says that economic growth will slow down throughout Europe this year and next. In developed economies, GDP growth is expected to decelerate to 1.5 percent on average, from 2.8 percent last year. In turn, new EU member states are expected to slow down from 6.2 percent to 4.6 percent on average.

IMF economists predict that the Polish economy will decelerate to 4.9 percent this year, followed by 4.5 percent next year. However, the good news is that this will still be one of the best figures among new EU member states.

The IMF expects that inflation will be around 4 percent in Poland this year. While this would be far above the central bank's 2008 inflationary target of 2.5 percent-with a possible deviation of 1 percentage point either up or down-it would still be one of the better results in the region. In the Baltic states, for example, inflation has already overshot 10 percent. It is also important that Poland's current account deficit will account for around 5 percent of the GDP, according to the IMF. The current account deficit is an indicator that shows how much money flows into the country and leaves it due to factors such as foreign trade or various financial transfers.

The European Commission, in its late-April economic forecast for EU member states, said that economic growth in EU countries would decelerate. The report says that EU economies will grow by 1.8 percent on average in 2008, followed by 1.7 percent next year. The GDP growth forecast for new EU member states is 4.6 percent this year and 4.3 percent next year.

In most Central European countries, GDP growth continues to run at a relatively high level. The forecast for Poland is 5.3 percent this year and 5 percent next year. Earlier the Commission projected 5.6 percent. Slovakia is expected to report the best result in the region, with 7-percent GDP growth this year, while Hungary is expected to be the worst performer, with a growth rate of just 1.9 percent.

The European Commission is especially concerned about a possible increase in inflation, driven by more expensive fuels and food. Europe is facing "a very strong inflationary shock," said Joaquin Almunia, the EU commissioner for economic and monetary affairs. According to the European Commission, eurozone countries must be prepared for average inflation at 3.2 percent this year, with new EU member states expected to be hardest hit. In Poland, the European Commission expects inflation to reach 3.8 percent, compared with the previously anticipated 2.8 percent. Almunia said Poland managed to combine high economic growth with a low inflation rate for a long period of time, but now inflation has begun to soar because food and oil prices are rising around the world and salaries in Poland have started going up. "I hope Poland will be capable of maintaining rapid economic growth without raising inflation pressure," he added.

The good news is that inflation is expected to slow down in the second half of this year. The commission's inflation forecasts for 2009 are better: 2.2 percent for the eurozone, 2.4 percent for the EU as a whole, and 3.4 percent for Poland.

According to the European Commission, domestic demand will continue to be the main driving force of Poland's GDP growth in 2008. Both investment and private consumption growth are likely to stay robust over this period. Investment is expected to grow at over 12 percent each year, on the back of foreign direct investment and an increased inflow of EU funds. Private consumption is expected to grow by 5.6 percent in 2008, primarily thanks to lower personal income taxes.

The recent international financial turmoil is expected to have a limited effect on the Polish economy due to factors such as strong demand for housing supported by rising employment and wages. As investment and consumption grow, imports are expected to increase by 10.5 percent in 2008, while export growth is expected to slow down to 6.9 percent this year, from 9.1 percent in 2007, due to lower external demand in those EU countries that are Poland's main trading partners.

Polish economists also predict a slight slowdown. According to a macroeconomic forecast released by the Gdańsk Institute for Market Economics (IBnGR) in April, the Polish economy will grow 5.4 percent this year, and then decelerate to 5.1 percent in 2009. The institute's experts say that in the coming years the Polish economy will be driven by construction and domestic demand, while inflation may put the brakes on GDP growth.

"Value added in construction will increase 9.5 percent this year and 10 percent in 2009, and the annual rate of growth of domestic demand will be 7.1 and 7.5 percent respectively. Investment growing at a rate of almost 20 percent will have the greatest influence on dynamic economic growth," the report reads.

According to the institute, total consumption is expected to grow by just over 4 percent in 2008-2009. The growth of total consumption will be slightly slower than that of personal consumption, which is expected to grow by anywhere from 4.8 to 5.2 percent this year and next.

"The key factors behind the growth of consumption will be growing wages and falling unemployment. In turn, consumption may be reined in by inflation, which is rising faster than expected," the IBnGR said. Rising wages will be supported by a further improvement on the labor market; the IBnGR expects unemployment to fall to 9.5 percent this year and 8.2 percent in 2009. However, the institute warns that this will also have a negative effect in the form of increased pay demands. However, the greatest problem of the Polish economy in 2008-2009 will be a rise in inflation to 3.8 percent at the end of 2008, followed by 3.2 percent in 2009, the IBnGR said.

The National Bank of Poland (NBP) also expects a slight deceleration in the rate of Poland's GDP growth this year. According to the bank's president, Sławomir Skrzypek, economic growth in Poland this year will be around 5.5 percent. "This is a very good figure, but it is important to keep a stable economic growth rate," he said. "Even a lower but stable rate is extremely valuable to us."

According to the NBP's latest macroeconomic projections of February 2008, the rate of Poland's economic growth should continue at a relatively high level of around 5 percent.

In the medium term, Poland is expected to show relatively fast and sustained economic growth based on strong foundations. These include intensive modernization in the manufacturing and infrastructure sectors, with the help of both national and international investors, accompanied by a large number of new jobs, falling unemployment, and continued macroeconomic stability, especially compared with other countries in the region.

The NBP predicts that domestic investment demand and consumption will have a significant influence on the country's GDP growth, while the contribution of net exports to GDP will decrease. In 2008, the central bank expects a slightly slower rate of growth in investment, compared with today's record levels-chiefly due to a global economic slowdown, increased energy prices and more expensive credit resulting from tighter monetary policies. However, if the global slowdown turns out to be temporary, in the following years investment is expected to grow faster than GDP. The high activity of domestic businesses will be supported by an inflow of FDI, EU funds and transfers of incomes from those working abroad.

Rapidly growing investment will contribute to future GDP growth. First of all, investment leads to greater labor productivity, the central bank says; second, as shown by the bank's research into FDI, investment helps modernize the economy and increases its innovativeness.

According to Skrzypek, in order to maintain rapid economic growth in the long term, it is essential to carry out a series of structural reforms and increase the effectiveness of the economy. These reforms include the demonopolization of infrastructure sectors and measures designed to stimulate the labor market, along with an appropriate migration policy and financial reforms that increase budgetary discipline. Of particular importance is the creation of incentives for foreign investors through the removal of institutional barriers, Skrzypek says.

The country's rapid economic growth has led to a prolonged appreciation of the Polish currency. In early April, the zloty traded at less than 3.50 to the euro, in what was the Polish currency's highest level in seven years. The zloty also hit some new highs against the dollar, trading at less than 2.20. Experts say the Polish currency is bound to grow even stronger and any hopes that the euro and the dollar will regain ground any time soon are in vain.

The main driving force behind the zloty's appreciation is the good performance of the Polish economy coupled with what happens on international markets. Like other countries in the region, Poland is frequently perceived as an attractive alternative to highly developed countries. In times of uncertainty on global markets, investors are particularly keen to search for rapidly developing countries that often prove to be better destinations for investment.

Higher returns on investment in zloty assets strengthen the Polish currency and make it more attractive to financial investors. Apart from macroeconomic factors, the zloty is appreciating as a result of money transfers from Polish citizens working abroad. The National Bank of Poland estimates that these transfers exceeded zl.20 billion last year, which was double their 2004 level. It seems, however, that the zloty's further appreciation against the pound and the euro will curb the influx of expat funds.

The continued appreciation of the Polish currency makes consumers happy, but at the same time it means trouble for exporters because a stronger zloty is hurting the profitability and competitiveness of Polish products on markets abroad. Despite this, exports continue to be a key driver in the country's economic growth. Last year Polish companies exported a record of over 101 billion euros worth of goods and services. So far neither the strong zloty nor problems experienced by other European economies have hampered Polish exports. This seems to indicate that negative economic trends in Europe do not have to spell trouble for Polish exporters. Just the reverse, at a time of a downswing, importers look for cheaper substitutes for products they bought previously, and Polish companies can grab this opportunity.

Poland owes its continuing high rate of export growth to its businesses which have been able to exploit demand abroad, especially in the European Union. Exports have driven the Polish economy for several years now, and a strong zloty has not been a great problem because companies continue to restructure and cut costs.

Another reason why export growth has been so high is that foreign-owned companies account for a large percentage of Polish exporters. They import supplies from their subsidiaries and affiliates outside Poland and are largely immune to exchange rate fluctuations and an appreciating zloty.

The contribution of foreign-owned companies to Poland's exports is steadily growing and has already exceeded 60 percent. Foreign-owned companies are usually less sensitive to temporary economic slowdowns and have greater funding opportunities and an ability to win new markets. These advantages help them achieve a much higher rate of growth in exports compared with Polish-owned companies.

There is every indication that Poland's exports performance in 2008 will not be much worse than in 2007, experts say. According to the central bank's recent projections, the country's foreign trade may continue to grow fast. Exports are expected to increase by 9.5 percent in 2008 and 2009 and by 9.9 percent in 2010. Central bank experts say this fast growth should not be affected by either a strong zloty or slower economic growth in the eurozone and the United States.

As the economy continues to expand and investment increases, unemployment in the country shrank to 11.1 percent in March, and more new jobs are being created. According to the EU statistical office, Eurostat, the unemployment rate excluding those working in the unregistered, tax-evading segment of the economy, has dropped to 7.7 percent in Poland. Thanks to this, for the first time, Poland is now ahead of France in this respect (which reported a 7.8-percent jobless rate in March, the same as in February). Poland has also eclipsed Greece and Spain. At the end of 2006 Poland had the highest unemployment rate in the EU. The drop in joblessness has been so considerable that it surpassed the most optimistic forecasts. According to the government's projections, the unemployment rate-calculated in a way similar to that used by Eurostat-was expected to drop to 8 percent no earlier than the end of this year.
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