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The Warsaw Voice » Business » March 18, 2009
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Still Growing But Slower
March 18, 2009 By Andrzej Ratajczyk   
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The global economic crisis has caught up with Poland: even though the country's gross domestic product grew a healthy 2.9 percent year on year in the last three months of 2008, this was nowhere near the 4.8 percent level recorded in the third quarter of last year.

According to the country's Central Statistical Office (GUS), individual consumption and gross fixed capital formation had the greatest contribution to GDP growth in the fourth quarter. They rose by 3.3 and 1.1 percent year on year respectively. Household consumption grew more than 5 percent year on year, and gross value added (GVA) increased by 3.4 percent in real terms. The market services sector expanded by 5 percent, remaining relatively unaffected by the slowdown. Analysts at the economy ministry expect market services to remain the main factor behind GVA growth throughout 2009.

According to the European Union's statistics office, Eurostat, the Polish economy grew by 3.1 percent year on year in the fourth quarter of 2008. Of all EU countries, only Bulgaria performed better than Poland, the office said, while the EU economy as a whole contracted by 1.3 percent compared with the fourth quarter of 2007.

Experts at the Polish economy ministry say the economy here has been affected by the global crisis with a delay. They predict that Poland's GDP growth will be below 2 percent this year.

That the Polish economy is slowing is also confirmed by business-cycle research conducted by the Economic Development Institute at the Warsaw School of Economics (SGH). According to the institute, business conditions in the manufacturing industry are deteriorating. Businesses are reporting decreasing output and a smaller number of orders, and are saying that their financial performance is deteriorating. Production of goods intended for export markets is also decreasing. The competitiveness of Polish goods on foreign markets and the profitability of exports are improving, the institute says, but exporters are unable to benefit from the latest depreciation of the Polish zloty due to a drop in foreign orders.

The National Bank of Poland expects the economy to continue to slow steadily until the fourth quarter of this year. In its latest inflation report released in March, the central bank predicts that the Polish economy will begin accelerating again in 2010 once the global economy shows signs of overcoming recession. The central bank projects that Poland's GDP will grow by 1.1 percent this year, 2.2 percent in 2010, and 3.7 percent in 2011.

According to the central bank, unemployment will be growing fast until 2011, with the LFS (labor force survey) unemployment rate expected to rise from 7.4 percent in 2008 to 14.5 percent in 2011. LFS unemployment is estimated on the basis of questionnaire surveys in which people who work under the table or are uninterested in taking up a job are not treated as unemployed, even if they are officially registered as such.

The economic slowdown will considerably limit inflation in Poland, experts say. The central bank predicts that inflation will fall to 1.9 percent in 2010 and 0.9 percent in 2011. This year, average inflation will still be at a relatively high level of 3.2 percent, partly due to increases in regulated prices and a weaker zloty, which makes imports more expensive. A weak zloty also means that mortgage borrowers who have taken out loans denominated in foreign currencies now have to pay higher installments. As a result, households have less money to spend on consumption.

International financial institutions are more optimistic about the prospects of the Polish economy. According to Thomas Laursen, World Bank manager for Poland and the Baltic states, a 2-percent GDP growth rate in 2009 is feasible. Of all the new European Union member states, Poland's fiscal and financial performance is the best, he said. He added that the international economic crisis has led to a drop in demand for Polish goods and services abroad, a trend that has hurt the Polish economy and foreign direct investment here.

Compared with other economies in the region, Poland shows more sustainable growth. This is largely because of private consumption, which is a key driver of economic growth in this country, Laursen said. According to a World Bank report, the Polish government's determination to maintain budget discipline is an important anti-crisis measure.

International rating agencies are fairly upbeat about Poland's economic performance, especially compared with other countries in the region. Ukraine has the worst ratings in the region, and the Baltic states may have their credit ratings lowered again. Standard & Poor's rates Ukraine at CCC+, while Fitch has a B rating for that country. Moody's cautions investors about buying Ukrainian bonds.

Baltic states, until recently hailed as Europe's economic tigers, have also seen their credit ratings revised downward in recent months. Latvia has been particularly vulnerable. As in the case of Ukraine, the country's tense political situation may lead to problems with meeting International Monetary Fund recommendations, experts say. Fitch has slashed Latvia's ratings twice since October.

According to Moritz Kramer, chief analyst for Europe and Africa at Moody's, Romania is also in trouble, and Hungary is more exposed to the financial crisis than other countries in the region. In an interview for Polish daily newspaper Rzeczpospolita, Kramer has stated that Poland holds a double advantage over other countries in the region: it is less dependent on foreign financing than the Baltics, and has fewer problems with access to credit and maintaining liquidity on the banking market. Additionally, the fact that exports make up a smaller portion of Poland's GDP than elsewhere in the region should work to this country's advantage, Kramer said.
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