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Poland.

Despite the deep OECD-wide recession, the Polish economy continued to grow in 2009 due to several factors, including: monetary easing; exchange rate depredation; relatively limited dependence on international trade; a sound banking sector and unleveraged private sector; tax cuts and other fiscal measures; and infrastructure investments linked to EU transfers and the 2012 football championship. Activity is projected to pick up, mainly driven by fixed investment, but to remain well below potential rates for some time. While headline inflation was, until recently, above the official target, it is expected to diminish steadily as economic slack increases.

The general government deficit is projected to reach levels that are unprecedented since the beginning of the transition process, but no fiscal consolidation measures have been announced for 2010 by the authorities. The constitutional public debt limit of 60% of GDP is being dealt with mainly through an ambitious privatisation programme. This will nevertheless only delay the much needed consolidation of public finances until 2011. The monetary authorities should refrain from any interest-rate increases unless circumstances change.

Economic growth has remained positive

GDP growth remained positive, in year-on-year terms, during the first half of 2009, supported mainly by private consumption. Even though various confidence indicators remain well below pre-crisis levels, they have improved in recent months. The latest data confirm that the scale of contraction in industrial production has shrunk an d manufacturing output has turned up, driven in part by temporary support measures for the car industry implemented by neighbouring countries.

The labour market has been resilient so far

The unemployment rate has increased somewhat, though at a significantly slower pace than in the early 2000s, and wage growth has accordingly diminished. Only a few firms have taken up a recent job subsidy perhaps reflecting constraints in terms of layoffs, the need to elaborate restructuring plans in return, or expectations of a rapid recovery in sales. It is nonetheless possible that firms will begin to shed labour in the months ahead.

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Public finances are deeply unbalanced

The disappearance of cyclical revenues has highlighted the extent of the deterioration of the underlying primary general government balance in recent years, leading to unprecedented overall deficits projected to be over 6% and 7% of GDP in 2009 and 2010, respectively. As a result, public debt is expected to increase significantly. If it exceeds 55% of GDP, a set of automatic consolidation measures will be triggered. Even though an ambitious privatisation programme (up to 3% of GDP by end-2010) should slow down the rise of the debt, the constitutional limit of 60% of GDP may be violated in 2011 if projected savings of 1% of GDP are not implemented by then. Even though steps have been taken to improve the transparency and efficiency of public finances, further efforts would be beneficial. The loophole of excluding the debt of the National Road Fund from the definition of the public debt should be closed by keeping the latter in strict compliance with the Eurostat approach. Public resources for co-financing projects subsidised by EU structural funds should be freed up by reducing social security benefits, broadening tax bases and increasing property taxes, while the creation of an independent fiscal council could help to provide objective grounds for reforms and increase their acceptability. Finally, the recent proposal to lower the contribution rate to the open (second-pillar) pension funds represents an important step backward, as this would increase future public pension liabilities and hamper the credibility and intergenerational stability of the overall pension system.

Monetary policy remains accommodative

The central bank further lowered its key policy rate by 25 basis points, to 3.5% in June. Headline inflation has been above the 2.5% (plus or minus 1%) official target and core inflation has been creeping up to almost 3%, fuelled by previous excess demand pressures. An unchanged policy rate should allow inflationary tensions to abate over the projection horizon.

Growth should pick up

Growth is expected to pick up over the next two years, mainly driven by fixed investment fuelled by EU funds, the preparations for the 2012 football championship and supportive interest and exchange rate levels, although these factors will be partly offset by tighter credit conditions. Private consumption is expected to remain subdued due to sluggish income gains and the impact of fiscal tightening required by constitutional rules.

Risks are mainly related to fiscal developments

Other than cyclical risks that apply to the whole OECD, the outlook for Poland is most sensitive to the credibility of the imminent consolidation plan, which is designed to allow an exit from the Excessive Deficit Procedure of the Stability and Growth Pact by 2013. Two rating agencies have recently threatened to downgrade Poland's debt because of insufficient fiscal discipline, which would have negative consequences for currency stability, the level of interest rates, private capital inflows and ultimately the strength and sustainability of the expansion.
Poland: Demand, output and prices

                            2006    2007   2008  2009   2010  2011

                         Current
                          prices       Percentage changes, volume
                           PLZ               (2000 prices)
                         billion

Private consumption         662.3    4.9   5.9    3.2   1.4   1.4
Government consumption      193.7    3.7   7.5    1.9   1.1   0.5
Gross fixed capital         208.3   17.2   8.2   -1.5   2.3  10.2
 formation
Final domestic demand     1 064.3    7.1   6.7    1.9   1.5   3.1
  Stockbuilding (1)          14.9    1.7  -1.1   -2.3   1.1   0.0
Total domestic demand     1 079.2    8.7   5.5   -0.3   2.7   3.2
Exports of goods and        427.8    9.1   7.0  -10.4   1.4   5.9
 services
Imports of goods and        446.9   13.5   8.1  -15.3   1.0   6.0
 services
  Net exports (1)           -19.2   -2.0  -0.7    2.6   0.1  -0.1
GDP at market prices     1 060.0     6.8   5.0    1.4   2.5   3.1
GDP deflator                  --     4.0   3.0    3.4   2.1   2.0
Memorandum items
Consumer price index          --     2.5   4.2    3.5   2.2   1.9
Private consumption           --     2.4   4.2    2.9   2.1   1.8
 deflator
Unemployment rate             --     9.6   7.1    8.4   9.6   9.6
General government            --    -1.9  -3.7   -6.4  -7.8  -6.8
 financial balance (2,3)
Current account               --    -4.7  -5.1   -1.7  -2.3  -2.5
 balance (2)

Note: National accounts are based on official chain-linked
data This introduces a discrepancy in the identity between
real demand components and GDP For further details see OECD
Economic Outlook Sources and Methods (http://www.oecd.
org/eco/sources-and-methods)

(1.) Contributions to changes in real GDP (percentage of
real GDP In previous year), actual amount In the first
column.

(2.) As a percentage of GDP.

(3.) With private pension funds (OFE) classified outside the
general government sector

Source: OECD Economic Outlook 86 database.

StatLink http://dx.doi.org/10.1787/753834513818
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Title Annotation:Chapter 3: DEVELOPMENTS IN INDIVIDUAL OECD COUNTRIES
Publication:OECD Economic Outlook
Geographic Code:4EXPO
Date:Nov 1, 2009
Words:1161
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