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The Polish economy in 2002

The Polish economy in 2002. Frigyes Ferdinand Heinz Research Office (London) Bank of Tokyo-Mitsubishi Ltd. Summary of main trends. MAJOR TRENDS: Modest recovery of GDP growth is expected in the second half of 2002.

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The Polish economy in 2002

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  1. The Polish economy in 2002 Frigyes Ferdinand Heinz Research Office (London) Bank of Tokyo-Mitsubishi Ltd.

  2. Summary of main trends MAJOR TRENDS: • Modest recovery of GDP growth is expected in the second half of 2002. • Inflation remains on a stable downward trend. The central bank is likely to meet its 4-6 % year end target. • Trade and current account deficit is likely to widen slightly to 6.5 and 4.5 % of the GDP respectively. KEY CHALLENGES: • Unemployment continues to rise. • Fiscal deficit is likely to remain high. • The role of debt financing is increasing.

  3. In 2001 the Polish economy slowed down sharply • GDP slowed down from 4% in 2000 to 1% in 2001 • The key reason for the slow down was the fall of domestic demand due to extremely tight monetary policy. • The weak domestic demand and the global slow down undermined business confidence, that led to a 10% fall of investments. • Negative growth was avoided due to resilient export growth.

  4. A modest recovery is expected in the second half of 2002 • GDP growth is likely to pick up slightly, reaching 1.3% in 2002 • Consumer spending is on the rise, signalled by increasing retail sales and improving consumer confidence index. • Export growth is likely to increase due to the pick up of EU demand. • Investment growth will only improve slowly, as real interest rates are still high, and the downsizing of excess stock is still not ended.

  5. Inflation is on a stable downward trend • In 2001 average inflation was 5.5%, year end inflation was 3.6%. • The key reason is the tight monetary policy. • In 2002 inflation continues to decline. Core inflation figures show the decrease of trend inflation. • The central bank, that continues its policy of small rate cuts (up to 50bps), is likely to reach its 4-6% year end inflation target.

  6. Trade and current account deficit is likely to widen slightly • Trade deficit was decreased from 8.2% of GDP in 2000 to 6.6% in 2001. At the same time CA deficit decreased from 6.1% in 2000 to 4% in 2001. • In 2002, the CA deficit is likely to widen to 4.5% of GDP, because of • the increase of domestic demand • the still strong currency • the moderate recovery of German export markets

  7. Challenge 1 : Rising unemployment • Unemployment is on a rising trend since June 2000. • Unemployment will continue to rise in the second half of 2002, due to • the weakness of recovery • the entering of a baby boom generation into the labour market • industrial downsizing • There are also structural reasons behind the rise of unemployment, such as the strong rigidity of the Polish labour market.

  8. Challenge 2 : Still high fiscal deficit • Fiscal deficit increased from 2.6% of GDP in 2000 to 5.5% in 2001 • Short term reasons: • slow down of the economy • overestimation of revenues and overspending due to election year • temporary effects of public finance reforms • Structural reasons: • inefficient institutional structure of public spending • poor fiscal discipline of large state owned enterprises • permanent increase of social spending

  9. Challenge 3 : The role of debt finance increases • The role of debt finance increases, because fiscal deficit remains high and privatisation revenues are lower than before 2001. • The fiscal deficit will be expected to increase slightly to 6% of GDP in 2002, because: • The 2002 budget managed to avoid a budget crisis by freezing and postponing expenditures. • However, no deeper structural measures took place, and budget deficit remained high • Growth remains below potential level.

  10. Some policy implications • What should the Polish government do ? • Take measures to decrease the rigidity of labour markets, such as using fixed-term contracts, differentiating minimum wage across regions, and for new labour market entrants. (addresses Challenge 1) • Continuing the reform of social security system, and decrease inefficient spending structures. This would make it possible to promote employment by decreasing non-wage labour costs. (addresses Challenge 1,2,3 ) • Go on with the restructuring and privatisation of large state owned enterprises. (addresses Challenge 2,3) • What the government should not do ? • Decrease the independence of the central bank that would erode most of the hardly earned credibility of the anti-inflationary policy.

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