Growing - and inflating

Polish economic growth has pleasantly surprised observers, but the accompanying level of inflation has some worried. Last Friday, the Finance Ministry released Q2 data indicating that GDP stood at 5.8 percent, beating the government's own Q2 forecast of 5.7 percent but falling from 6.1 percent in Q1.

Domestic demand increased 6.2 percent, driven by corporate and consumer spending. At the same time, investments grew 15.2 percent y/y.

"These data show relatively strong growth of gross domestic product, which is only slightly weaker than the first quarter. What is important is that domestic demand is still pulling the economy along, we still have rising investment," Grzegorz Maliszewski, chief economist with Bank Millennium, told Reuters.

Q2 growth was slower than the 6.4 percent recorded in the same period of 2007 and the Finance Ministry believes that economic growth will slow further, to 5.0-5.2 percent. The ministry remains positive, however, that 2008 GDP will amount to the 5.5 percent estimated in the budget.

"The data do not pose a risk of [annual] economic growth of less than 5.5 percent," Deputy Finance Minister Katarzyna Zajdel-Kurowska said in a statement.

At the same time, strong growth over the last two years has driven up inflation. The inflation rate amounted to 4.8 percent in July, and the central bank raised interest rates. Last week, meanwhile, the  bank left rates unchanged at six percent, a move in line with market expectations.

"Dynamic economic growth on the back of domestic demand could strengthen the position of hawks in the Monetary Policy Council and open the doors for one more rate rise this year (probably in October)," said Piotr Kalisz, a senior economist at Citi.