Abstract
This 2005 Article IV Consultation highlights that the annual growth in Poland in 2004 reached 5½ percent, with a surge in growth in the run-up to European Union accession dissipating in the second half of 2004. Both domestic and net external demand contributed to the slowdown. Consumption and inventory accumulation had supported output growth as contribution of net external demand diminished, but by mid-2004, these sources of demand growth slackened. The recovery has started to produce jobs, but the employment rate remains low owing to structural rigidities and demographic pressures.
1. This statement reviews developments in Poland since the preparation of the staff report for the 2005 Article IV consultation. The additional information does not change the thrust of the staff appraisal.
2. Economic developments continue to present a mixed and rather difficult to interpret picture.
The deceleration of exports of goods and services (in US$) continued in May. Exports increased at a seasonally adjusted annualized (quarter-on quarter) rate of 3.7 percent in the three months through May (down from 13.9 percent in April), while imports grew at 8.1 percent (on the same basis). The slowdown in exports is somewhat more pronounced than projected by staff.
Industrial sales (in real terms), however, picked up strongly in the three months through June, increasing at a seasonally adjusted annualized (quarter-on quarter) rate of 11.4 percent (up from -1.4 percent in May). Manufacturing sales and construction activity showed similar rebounds.
CPI inflation was 1.6 percent in the three months through June (seasonally adjusted annualized quarter-on quarter), slightly lower than projected by staff.
Labor costs in the corporate sector jumped in recent months, but it is too early to tell if this is due to one-off effects, delayed adjustment to decelerating inflation and production (until May), or genuine wage pressures. Nominal unit labor costs in manufacturing increased at a seasonally adjusted quarter-on quarter annualized rate of 12.2 percent in the three months to May, up from about 7 percent in the three months to March. Nominal wages in the enterprise sector rose at a seasonally adjusted quarter-on-quarter annualized rate of 5 percent in the quarter to June, up from 2.7 percent in the quarter to May.
Unemployment continued to fall in May, dropping to 18.4 percent (seasonally adjusted). Seasonally adjusted employment in the enterprise sector, however, remained unchanged during February through June.
3. In June, the MPC cut policy rates by 50 basis points for the third time this year and adopted an easing bias. The central policy rate now stands at 5 percent. Despite the cut, the zloty remained broadly stable against the euro. Financial markets are pricing in further reduction in interest rates amounting to about 75 basis points by the end of 2005.
4. In a pre-election environment, several pieces of legislation have been passed by one of the houses of Parliament and if they survive the rest of the legislative process, they would have negative economic and fiscal implications. Legislative actions initiated by MPs, and opposed by the government, would: change the formula for indexing the minimum wage with the aim of gradually raising the minimum wage to half of the average wage; cap the interest and other costs lenders can charge on loans, despite opposition from the NBP; postpone the planned curtailment of access to early retirement (official estimates put the total cost to the budget of this change in 2007-10 at about 1½ percent of GDP); and allow individuals to reclaim part of the VAT paid on construction and refurbishment materials to compensate for the increase in the rate following EU accession (the MoF estimates that the total cost of this legislation would be about ½ percent of GDP in 2006-2009, when the refunds could be claimed). None of these pieces of legislation has entered into force pending approval by both houses of Parliament and the President.