Transcript A modest recovery is expected in the second half of 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.
• 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.
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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.
Real GDP growth (year on year change)
9
8
7
6
%
•
5
4
3
2
1
0
Q1 95
Q1 96
Q1 97
Q1 98
Q1 99
Q1 00
Q1 01
Q1 02
3
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.
Retail trade (year on year change)
30
25
20
15
10
5
0
Jan-99
-5
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
-10
4
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.
Consumer price inflation and the central bank's
reference interest rate
20
18
16
14
12
10
8
6
4
2
0
Apr-00
Aug-00
Dec-00
Reference rate
Apr-01
Aug-01
Dec-01
Apr-02
CPI Inflation (y on y)
5
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
The Polish Zloty/Euro exchange rate (7th January
2000 = 100)
Jan-00
M ay-00
Sep-00
Jan-01
M ay-01
Sep-01
Jan-02
M ay-02
80
Appreciation
Depreciation
85
90
95
100
105
6
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
•
Registered unemployment rate in Poland
20
18
16
%
•
14
12
10
8
Jan-98
Aug-98
M ar-99
Oct-99
M ay-00
Dec-00
Jul-01
Feb-02
There are also structural reasons
behind the rise of unemployment,
such as the strong rigidity of the
Polish labour market.
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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
8
General government balance in % of GDP
and real GDP growth
6
4
2
%
•
0
-2
1995
96
97
98
99
00
01
02*
-4
-6
-8
* ICEG forecast
general government balance
real GDP growth
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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.
Public debt in % of GDP
70
60
50
%
•
40
30
20
10
0
1995
96
97
98
99
00
01
02*
* ICEG forecast
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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 nonwage 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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