Hotter than anticipated

In Q3, Poland's economy enjoyed its fastest growth in more than two years, beating analysts' forecasts. Data released last Thursday showed that the biggest expansion was in corporate investment - more than at any time since 1997.

The Central Statistical Office's figures showed that Poland's GDP rose 5.8 percent in Q3 year-on-year, the strongest increase since Poland joined the EU in May 2004. The figure was well above analysts' expectations of 5.5 percent, and up from the 5.5 percent increase seen in Q2. Following the announcement the złoty rose around 0.1 percent.

Analysts greeted the dominant role of investments with optimism, saying it meant that growth need not lead to inflation. "The structure of growth is positive from the point of view of its long-term durability," said Grzegorz Maliszewski, an economist with Bank Millennium in Warsaw. "Such growth, driven by investment, does not generate the same inflation pressure as growth driven by private consumption, so this is good data from the point of view of monetary policy."

The data boosted expectations that the economy could grow by at least 5.5 percent overall this year, around twice as fast as the eurozone and far exceeding the state budget's 4.3-percent forecast.

With EU money driving a huge infrastructure program, the data showed that investments rose 19.8 percent year-on-year, the fastest growth since Q4 of 1997. Domestic demand rose 6.1 percent, up from 4.8 percent in Q2.

Yet overall the economy continues to lag behind its CEE neighbors and the central bank is expected to wait until well into next year before its first rise in interest rates because inflation remains significantly below its 2.5 percent target.

Some economists are concerned that the increased investment is only due to the inflow of EU funds and has gone to the development of infrastructure rather than being spent on education and improving manufacturing technology. After years of growth based on low wages and cheap exports, they say Poland runs the risk of getting caught between the more sophisticated Western economies and cheaper producers such as Romania and Bulgaria, who join the EU in January.

"Poland's private sector invests relatively little in research and development," OECD secretary general Angel Gurria said. "Poland is no longer just the low wage place. It has to prepare itself to compete with developed economies." (Reuters)