An island of relative calm

Poland will see stunted economic growth in the near future, but will fare better than many of its regional and EU peers, according to the European Commission. The EU's executive branch painted a stark picture of bloc's economy in its Economic Forecast Autumn 2008 report, issued last week.

According to the EC, the global financial crisis will hit all European economies, but some much harder than others.

"Recognizing that the situation is exceptionally uncertain, our baseline scenario is for a modest recession in the EU and the euro area until the end of this year with a gradual recovery to be expected from mid-2009 - for most but not all Member States," the EC said in its report.

Countries like Germany, which have "gained in price competitiveness," are expected to recover faster than countries like Romania, the Baltics and Hungary, the latter of which was the subject of a $25.1 billion relief package in October. Italy and Spain were also mentioned as countries unlikely to bounce back quickly.

Sound fundamentals

Poland, meanwhile, was described as having sound fundamentals. The EC's forecast for the Polish economy does take into account casualties, but GDP growth is expected to remain relatively healthy.

"Domestic demand will continue to be the main driving force of GDP growth, which is expected to fall to 3.8 percent in 2009 and 4.2 percent in 2010," the EC said.

The unemployment rate is expected to rise modestly in Poland, but will remain much lower than the 17.8 percent recorded in 2005. In contrast, the Baltics, Ireland, the UK and a few other countries have already seen pronounced decreases in employment, and Latvia and Lithuania are expected to see decreasing trends for some time. The only country forecast to see strong employment growth is Hungary.

Inflation effects

The EC left its 2008 inflation forecast for Poland unchanged at 4.3 percent; inflation is expected to fall to 2.5 percent by the end of 2010. Inflation forecasts for all other member states were revised upward, with the exception of Hungary (unchanged) and Latvia (revised downward). Bulgaria, Lithuania and Latvia saw the largest upward revisions.

As inflation falls in Poland, growth of food and fuel prices is expected to stabilize as well. The EC noted, however, that Latvia, Lithuania, Bulgaria and Romania had so far been hit hardest by food-price growth.

Variables and outlook

The Polish government's gross debt is expected to continue to decrease despite the adverse financial climate. The EC forecasts it falling from 44.9 percent of GDP last year to 43 percent in 2010. This forecast does not take into account certain variables, such as the possible implementation of a flat personal income tax or the effect of healthcare reform. It does, however, seem to take into account falling revenues from underperforming privatization plans.

Other factors which could affect the economic forecast include the tightening of lending policies, which may deter FDI and private investment, as well as the possibility of a long-term depreciation trend of the Polish złoty, which could boost FDI and affect inflation.

As for the Polish financial sector, the EC's outlook was cautiously optimistic.

"The Polish financial sector, which is dominated by universal banks with a strong deposit base, has proved to be resilient to the global financial crisis so far, but some small and medium-sized banks are dependent on foreign financing making them vulnerable to external developments," the report said.