The good news regarding the Polish economy dominated the last few weeks. The Central Statistical Office’s report showed that retailer moods are getting better in almost all sectors. The unemployment rate stabilized in August on 10.8% and retail sales rose 5.7% in July. The best news by far was the GPD-growth figures of the second quarter. The Central Statistical Office reported a 1.1% y-o-y growth, sparking a wave of optimistic and confident statements. The Finance Ministry announced that it will lower its debt issuance in light of better economic trends. The optimistic mood was present in the European Commission’s interim forecast too, in which the EC predicts a 1% GDP growth for Poland in 2009. To cast a shadow on these developments were figures that show 20% y-o-y rise in consumer debts in Q2 2009. Also, the Polish current account turned from a surplus of EUR 459 million in June to a EUR 565 million deficit. The budget deficit is a worrying aspect for international actors. Fitch Ratings predicts a rate of 5.5% of GDP in 2009 and 6.3% in 2010. Industrial orders were down 32.3% y-o-y in August.


Analysis and forecast: decreasing risk

The news seems to support the expectation of government officials, who – especially after the publication of Q2 GDP figures – seem certain of a GDP growth this year. The Q2 growth data spurred a government PR offensive, and only Prime Minister Tusk showed some restraint when he touched on the subjects of euro introduction and economic growth. Contrary to previous statements, the revised euro adoption plan didn’t come out in August, and the PM didn’t mention one either, citing the need for a stable exchange rate before designating a date. On the growth topic, he was right about stressing the importance of the debt level.


It seems that there is a growing gap between the future of the economy and the fiscal course. While the former appears to be on a healthy road to growth, the latter’s prospect is declining steadily. The most neuralgic point seems to be the size of the budget deficit. More and more eyes turn to this subject as it is becoming doubtful that the government can keep the target. It plans to partly finance the deficit revenues from privatization, but that will bring forth many conflicts. Already the government had to back down from selling 41% of the copper producer KGHM due to employee demonstrations, and had to settle for 10%. Also, the sale of the Gdynia and Szczecin shipyards still hasn’t gone through. The plan to sell stakes in energy companies will surely be met with President Kaczyński’s objections. One of the most questionable and contradictory initiatives is the notion of financing the budget gap with the Demographic Reserve Fund (FRD). This could easily draw the biggest amount of criticism. The recently approved 2010 budget draft contains a deficit goal of PLN 52.2 billion, almost double of this year’s target. The market has already signaled its uneasiness over the 2010 deficit target, as bond yields rose 5-7 basis points along the curve on 7 September on concerns that the deficit would make borrowing needs soar. Two days later demand was weaker than expected for Polish bonds, whose yield was pushed due to the declining prices, so it was not surprising that BNP Paribas advised to sell bonds because of a “very dangerous” fiscal outlook for the country. Another worrying economic aspect is unemployment. The slight rise in the unemployment rate in the summer meant that the number of jobs created in farming, forestry and tourist sectors couldn’t counter the lay-offs in the manufacturing sector. Even the government expects the rate to rise above 12%, but analysts believe it will be closer to 13%. All in all, Poland might face the same issue that Hungary suffered, albeit at a smaller scale. It will have to initiate tough austerity measures when the European economy is growing at an accelerating rate, hampering the growth potential of the country.



Source: Central Statistical Office



Source: National Bank of Poland