After slowing sharply in 2012 and in Q1 2013, the Polish economy has begun to recover again in a movement fuelled essentially by exports because domestic demand is slow to pick up. In the years ahead, fiscal policy will benefit from the pension system reform announced in early September, which aims to transfer part of the mandatory funded pillar introduced in 1999 back to the general public scheme. Yet this move increases contingent public debt in the long term and, above all, risks destabilising the markets in the short term.
End of a severe slowdown
When the crisis first broke out, Poland stood apart for its proven capacity to continue expanding while the rest of the European Union slipped into recession. Its limited openness to international trade, not as strong as for the Czech Republic, Slovakia or Hungary, helped shelter it from exogenous shocks. At the same time, domestic demand was supported by countercyclical fiscal policy and relatively accommodating monetary policy through the end of 2010. Under this environment, real GDP growth was strong at 4.5% in 2011. Last year, activity slowed down sharply, however, with growth of only 1.9%, undermined by the Europe’s economic downturn and by the erosion of domestic demand.
Until then, household consumption had been maintained solely at the cost of a spectacular reduction in the savings rate. This trend has since corrected itself, notably for precautionary reasons, justified by high unemployment, which has held above 12% since early 2010. The fiscal tightening introduced in 2011 intensified with cutbacks in public investment and a freeze on public sector wages. Faced with surging inflation (partially due to a VAT increase), the central bank launched a new round of monetary tightening in January 2011, raising its key policy rate from 3.5% at year-end 2010 to 4.75% in May 2012. It did not begin easing monetary policy again until November 2012, once consumer price inflation had fallen below 4% and neared its target range of 2.5% ± 1%.
The economic slowdown continued through Q1 2013 with year-on-year growth of only 0.5%. A rebound began to take shape in Q2 (0.8% y/y), and available indicators for the months thereafter justify a certain optimism. Retail sales and industrial production, for example, were both upbeat in July (up 4.3% and 6.3% y/y, respectively). Manufacturing PMI rose to 52.6 in August from 49.3 in June. The recovery is driven primarily by exports, up 3.1% in volume in H1 2013 compared to the year-earlier period. Exports are benefiting especially from Germany’s strong performance, as this country each year absorbs about a quarter of Polish exports.
BY Alexandre VINCENT
To Read the Entire Report Please Click on the pdf File Below.
End of a severe slowdown
When the crisis first broke out, Poland stood apart for its proven capacity to continue expanding while the rest of the European Union slipped into recession. Its limited openness to international trade, not as strong as for the Czech Republic, Slovakia or Hungary, helped shelter it from exogenous shocks. At the same time, domestic demand was supported by countercyclical fiscal policy and relatively accommodating monetary policy through the end of 2010. Under this environment, real GDP growth was strong at 4.5% in 2011. Last year, activity slowed down sharply, however, with growth of only 1.9%, undermined by the Europe’s economic downturn and by the erosion of domestic demand.
Until then, household consumption had been maintained solely at the cost of a spectacular reduction in the savings rate. This trend has since corrected itself, notably for precautionary reasons, justified by high unemployment, which has held above 12% since early 2010. The fiscal tightening introduced in 2011 intensified with cutbacks in public investment and a freeze on public sector wages. Faced with surging inflation (partially due to a VAT increase), the central bank launched a new round of monetary tightening in January 2011, raising its key policy rate from 3.5% at year-end 2010 to 4.75% in May 2012. It did not begin easing monetary policy again until November 2012, once consumer price inflation had fallen below 4% and neared its target range of 2.5% ± 1%.
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The economic slowdown continued through Q1 2013 with year-on-year growth of only 0.5%. A rebound began to take shape in Q2 (0.8% y/y), and available indicators for the months thereafter justify a certain optimism. Retail sales and industrial production, for example, were both upbeat in July (up 4.3% and 6.3% y/y, respectively). Manufacturing PMI rose to 52.6 in August from 49.3 in June. The recovery is driven primarily by exports, up 3.1% in volume in H1 2013 compared to the year-earlier period. Exports are benefiting especially from Germany’s strong performance, as this country each year absorbs about a quarter of Polish exports.
BY Alexandre VINCENT
To Read the Entire Report Please Click on the pdf File Below.
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