Polish economy performance stable
The Polish economy has performed well on the back of very strong policies and fundamentals, but growth is now slowing, as a result of developments in the euro zone.
The key policy challenge is to provide support to the economy. Monetary easing is therefore welcome and further rate cuts are needed. The pace of structural fiscal consolidation is being maintained, while automatic stabilizers are being allowed to operate, which is appropriate given the narrower fiscal space available. The banking system has remained strong, but non-performing loans (NPLs) may require more proactive solutions.
After robust growth last year, the Polish economy is feeling the effects of headwinds from Europe. Growth is moder- ating amid weaker export demand and confidence effects on private investment and consumption, which have combined with lower public investment. Economic activity is projected to slow further. Rising unemployment and tight credit availability are expected to weigh further on household spending. Public investment will continue to decline and private investment is expected to rebound only when uncertainty about external and domestic prospects dissipates. Overall, GDP growth is projected to slow from about 2¼ percent in 2012 to 1¾ percent in 2013. Risks around this outlook are on the downside, as a deeper or more protracted slowdown in Europe or a reintensification of the crisis would affect Poland through substantial trade and financial channels.
We welcome the recent cut in the policy interest rate and see room to continue the monetary easing cycle. With the economy slowing and inflation pressures receding, further cuts in the policy rate are already clearly warranted. In the event of a sharper deterioration in economic conditions than currently anticipated, and given the limited fiscal space, additional easing would be required.
The impressive fiscal consolidation has continued, and the draft 2013 budget balances further fiscal adjustment and support for the economy. Despite weaker-than-expected VAT revenues, the general government deficit is projected to drop by 1½ percentage points to about 3½ percent of GDP in 2012. The 2013 budget rightly continues the structural consolidation (with measures of some ½ percent of GDP).