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Poland Economic Outlook, Q3 2009

By Mary Stokes

Executive Summary

  • Poland boasts the mildest downturn in the region;
  • Private consumption is faltering as a growth engine;
  • A new Flexible Credit Line is a major positive, but risks remain.

Poland’s economy is in better shape than its regional peers and will experience the region’s mildest recession in 2009.  Among the few EU countries to post positive real growth in Q1 2009, the economy expanded 0.8% y/y. RGE Monitor does not see the positive growth continuing and is forecasting -2.0% growth in 2009 and flat growth in 2010.

Like elsewhere in the region, falling net exports, weak domestic demand and tight lending conditions are driving the negative growth forecast. Not all is doom and gloom, however. Record-low interest rates, moderate external imbalances, and a relatively low dependence on exports are cushioning the blow. Moreover, the risks surrounding Poland’s growth outlook eased considerably when the country secured a $20.5 billion flexible credit line from the IMF in May. Despite these bright spots, Poland’s strong trade and financial linkages with Western Europe (particularly Germany) mean a recovery ultimately depends on a pick-up in the eurozone economies.

Private Consumption Faltering as a Growth Engine

Private consumption has driven Poland’s economic growth in recent years. Rising unemployment (expected to exceed 12% by year-end) and tighter lending are eroding consumers’ ability to continue supporting the economy. Another factor that may weigh on Polish consumers is zloty depreciation, which could negatively affect households who borrowed in Swiss francs and euros. About a third of total lending in Poland, and 70% of mortgages, are foreign currency-denominated. While these levels may be lower than those of regional peers like Hungary, a pick-up in the zloty’s depreciation (down 25% y/y against the euro) could further tighten households’ purse strings.

Trade accounts for a lower share of GDP in Poland, the region’s biggest economy, than elsewhere in Eastern Europe. The country’s export-to-GDP ratio is a relatively modest 40%.  Nevertheless, declining exports—set to tumble by over 10% y/y in 2009—will still exert a drag on growth.

Flexible Credit Line a Major Positive, but Risks Remain

Poland significantly lowered its risk profile and reassured markets when it secured a $20.5 billion flexible credit line (FCL) from the IMF in May. More flexible than a standby agreement, the FCL does not come with conditions attached and is geared toward countries with strong fundamentals.  The FCL is a positive for the growth outlook because it bolstered investor sentiment and distinguished Poland from other more vulnerable countries in the region.

Nevertheless, risks remain. A key risk is the potential for knock-on effects from crises elsewhere in the region. The Baltic states are a particular hotspot. While Poland’s trade and financial linkages with these countries are limited, negative developments in the Baltics could potentially scare investors away from the region as a whole.

Limited Wiggle Room on Monetary and Fiscal Policy

Poland’s budget deficit looks set to rise above 6% of GDP this year, well above the 4.6% originally planned by the government. Not only does the wide budget deficit limit the government’s space to maneuver on fiscal policy, it also means Poland will find it difficult to meet its 2012 euro adoption target. Such a delay could hurt investor sentiment.

Authorities have a bit more wiggle room on monetary policy. Inflation is forecast to ease to around 3.0% this year, within the official target of 2.5% (+/- 1%). Easing inflation has allowed the National Bank of Poland to cut the key policy rate to an all-time low of 3.5% in June, but RGE Monitor sees limited room for more easing, as further cuts are unlikely to significantly loosen up credit.

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