Country Report Poland October 2008

Outlook for 2009-10

• The coalition government of the centre-right Civic Platform (PO) and the agrarian Polish Peasants' Party (PSL) offers good prospects for political stability, at least in the short term.
• The PSL's demands for special treatment for its supporters are nevertheless likely to increase over time. As a result, the coalition may not survive a full parliamentary term, leaving the PO to govern as a minority administration.
• The government will adopt a more liberal approach to economic policy than its predecessor, but opposition from the president and the PO's hopes of winning the presidential election in 2010 make radical changes unlikely.
• Economic growth is forecast to slow from an estimated 5.3% in 2008 to less than 4% per year in 2009-10 as external demand weakens and tighter monetary policy weighs on domestic demand.
• Continuing rapid wage growth will mean that consumer price inflation will fall only slowly in 2009, although slower economic growth will allow inflation to fall more substantially in 2010.
• The current-account deficit will continue to widen, expanding to 6.2% of GDP in 2009. Recovery in western Europe will allow the deficit to narrow to 5.6% of GDP in 2010.

Monthly review

• The prime minister's declaration that the government would like to meet all the conditions for euro zone entry in 2011 is having political consequences.
• Euro zone entry may require a change in the constitution. The government does not have the parliamentary votes required to approve the change if it is resisted by the main opposition party, the right-wing Law and Justice (PiS).
• There may be a referendum on euro adoption, which could be held in early 2009.
• The government is belatedly working out a timetable for Polish entry to European economic and monetary union (EMU) with the National Bank of Poland (NBP, the central bank).
• The monetary policy council (MPC) will have to modify its approach to monetary policy if 2012 is adopted as a firm target for EMU entry and the zloty enters the EU's exchange-rate mechanism (ERM2) in 2009.
• Monthly economic indicators were weaker than generally expected in August, suggesting that economic growth will slow significantly in the third quarter.
• Revised balance-of-payment figures have pushed up the current-account deficit for 2007 from US$15bn (3.8% of GDP) to US$20bn (4.7% of GDP).

Source: Country Report