Poland: Staff Report for the 2007 Article IV Consultation Supplementary Information
Author: International Monetary Fund
Publication Date:
18 Apr 2008
eISBN:
9781451832037
ISBN:
9781451832037
Language:
English
Keywords:
ISCR; CR; GDP; deficit; core inflation; Poland; authority; higher-than-expected inflation; term upside risk; credit growth; rising core inflation; volume growth
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The external sector has an increasing drag on the economy. The current account deficit remains fully financed by FDI, and the underlying balance is consistent with external-debt stabilizing levels. The stock market retrenchment has been severe, but it followed substantial gains since 2006. Stress tests show that resilience of the banking system is well capitalized and highly profitable. Executive Directors stressed that the key to boosting long-term growth will be to increase low labor market participation. The financial supervision authority should give priority to formalizing understandings.

Abstract

The external sector has an increasing drag on the economy. The current account deficit remains fully financed by FDI, and the underlying balance is consistent with external-debt stabilizing levels. The stock market retrenchment has been severe, but it followed substantial gains since 2006. Stress tests show that resilience of the banking system is well capitalized and highly profitable. Executive Directors stressed that the key to boosting long-term growth will be to increase low labor market participation. The financial supervision authority should give priority to formalizing understandings.

This supplement to the staff report for the 2007 Article IV consultation with Poland provides information on recent developments and discusses the implications of these developments for the economic outlook and for monetary policy.

Summary

Recent data suggest that GDP growth, as well as inflationary and wage pressures, have been stronger going into 2008 than assumed in the staff’s baseline scenario. There is also still no evidence of a notable impact of the global market turmoil on Poland. However, in view of the expected slowdown in major export markets, staff has reduced its GDP growth forecast and slightly lowered its end-year inflation forecast for 2009. Following a further increase in policy interest rates recently, the third increase this year, a continuation of the tightening cycle will depend on whether wage pressures ease in the coming months.

Recent Developments

1. GDP growth remains robust; inflationary pressures are not abating; and there are no signs of substantial spillovers from the global turmoil through real or financial channels:

  • High-frequency indicators point to stronger GDP growth than assumed in staff’s baseline scenario. Growth in industrial production is slowing less than expected, retail sales remain very strong, and exports have continued to grow.

  • Inflation is still rising. Head-line inflation increased to 4.2 percent (year-on-year) in February. This is significantly above the central target of 2.5 percent and well outside the NBP’s upper tolerance limit of 3½ percent for deviations from this target. Coreinflation is estimated to have risen from 1.7 percent at end-2007 to 2.5 percent at end-February.

  • Labor markets have continued to tighten. Employment is still increasing, and nominal wage increases rebounded to above 10 percent (year-on-year) in January-February, having temporarily slowed in December.

  • The global turmoil has lead to some further increase in credit default swap and bond spreads, with the latter increasing about 30 basis points since the beginning of 2008. Credit growth, however, is still largely unaffected, with credit to the household and corporate sectors growing by about 30 and 20 percent, respectively, in real terms.

Monetary and fiscal policies

2. The monetary tightening cycle has continued. The Monetary Policy Council (MPC) recently increased the policy rate by 25 basis points, the third such increase since the beginning of year, stressing the further rise in inflation and pressures in the labor market. The policy rate now stands at 5.75 percent, 175 basis points higher that in April 2007, when the tightening cycle began. Despite the further tightening, the zloty has appreciated by less than 3 percent versus the euro since the beginning of the year.

3. Fiscal policy is still set to add some stimulus in 2008. Recent data point to a better-than-budgeted fiscal position in 2008, as anticipated in the Staff Report. In particular, March CIT receipts were larger than projected, thanks to continuous strong corporate profits, while expenditure execution has so far been lower than anticipated. Staff nonetheless now projects a somewhat larger fiscal stimulus in 2008—of about ½ percent of GDP—because the fiscal outcome for 2007 was somewhat better than anticipated. As to other fiscal issues, the authorities’ updated Convergence Program targets a deficit of 1 percent of GDP by 2011, consistent with their commitment to a more ambitious fiscal consolidation path. Also, following up on staff’s recommendation to strengthen the medium-term fiscal framework, an FAD technical assistance mission visited Warsaw in late March and left the authorities an aide-memoire providing advice on implementing such a framework, including establishing expenditure ceilings.

Revisions to the outlook

4. Staff has reduced its projection for GDP growth in 2009. Driven by the downward revisions to euro area growth projections in the Spring WEO, staff expects export growth to slow moderately compared to the baseline forecast in the staff report, starting in the second half of 2008. This slowdown is expected to largely offset the stronger GDP growth evident from data going into 2008—staff has maintained its GDP growth forecast of 4.9 percent for 2008. In 2009, however, the slower export growth is expected to translate into a reduction in GDP growth to 4.5 percent, which is a reduction of about ¼ percentage point relative to the previous baseline.

5. Despite the higher inflationary pressures at this time, staff expects a modest easing compared to its baseline inflation forecast for 2009. In view of higher–than-expected inflation in early 2008, staff has increased its forecast for 2008 from 3.8 percent to 4.0 percent (year average). However, consistent with the lowering of the GDP forecast for next year, the projected rate of inflation by end-2009 has been lowered from 3.7 percent to 3.5 percent.

Staff assessment

6. The change in external outlook poses a challenge for monetary policy. The negative spillovers from the expected slowdown in export markets, together with the delayed impact of the recent monetary tightening, will slow baseline GDP growth to slightly below its estimated potential next year. This together with the projected stabilization of commodity prices should eventually lead to a gradual easing of inflationary pressures. However, while staff believes that the risks to its baseline growth forecast are equally balanced at this stage, it is concerned about near term upside risks to its inflation forecast. In particular, the continued tightening of labor markets and increase in core inflation evident from recent data point to the risk, as discussed in the staff report, that the strong increase in ULC that has been under way will increasingly be reflected in prices because the scope for compressing profit margins might have run its course. In view of this, a continuation of double digit wage increases and rising core inflation in the coming months would, in staff’s view, warrant additional tightening. The slightly higher fiscal stimulus in store for 2008 will increase the burden on monetary policy but not appreciably so.

7. The weakening of the external outlook has not changed long-term challenges. Most important in this regard is preserving competitiveness by containing demand pressures, while raising potential growth by boosting the labor supply. From this perspective, Staff welcomes that the update of the Convergence Program includes a more ambitious medium-term target for fiscal consolidation than what was envisaged in the previous version.

Table 1.

Poland: Selected Economic Indicators, 2002–09

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Sources: Polish authorities; and IMF staff estimates.

Derived as total savings minus the current account minus capital transfers.

Fund definition (including pension reform costs).

Polish definition of debt including risk weighted stock of outstanding guarantees.

Yield on 7-day NBP money market bills.

The methodology for computing interest rates was changed in 2004 to fulfil ECB requirements.

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Cover IMF Staff Country Reports
Republic of Poland: 2007 Article IV Consultation: Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Poland
Author: International Monetary Fund
Volume/Issue:
Volume 2008: Issue 130
Publisher:
International Monetary Fund
ISBN:
9781451832037
ISSN:
1934-7685
Pages:
67
DOI:
https://doi.org/10.5089/9781451832037.002