Inflation ahead?

The Polish economy has plenty to boast about. According to the Ministry of Labor, unemployment in June stood at 12.4 percent - the lowest figure since 1999. By comparison, at the end of 2006 the unemployment rate was 14.9 percent. The chief economic advisor at PricewaterhouseCoopers (PwC), Witold Orłowski, maintains that the declining unemployment figures are not only due to Polish emigration to the West, but also because of a real increase in employment.

"The two factors together make the fall of unemployment so conspicuous," he said. Orłowski expects the trend to continue and thinks that the unemployment rate could drop to 12 percent by the end of the year. "Then the decrease will slow, probably stopping somewhere at the level of 9-10 percent," he predicts.

Another positive signal is GDP growth, which in Q1 reached 7.4 percent, y-o-y. By comparison, in Q1 of 2006 it stood at 6.6 percent, while in the first quarter of 2005 it grew by 3.6 percent. But Orłowski is cautious. "The first quarter was so good because the construction industry had favorable conditions due to the unusually warm winter," he explained. Nevertheless, Orłowski remains optimistic that Poland can maintain its fast-paced economic growth. "In the next two years we should grow at over six percent annually," the PwC economist claims.

Pay increase

Poland's good economic data is finally being reflected in average Poles' wallets. In the first five months of this year, the average wage grew by 8.2 percent y-o-y, according to the Central Statistical Office. The increase was most visible in the construction sector, where the average salary grew by over 15 percent in comparison to the corresponding period of 2006.

However, with productivity growing slower than wages - at 8.1 percent y-o-y for the first five months of the year - analysts worry about possible inflation troubles. "This is not good. This is guaranteed [to boost] inflation," said Orłowski, adding that to keep inflation in check, productivity must grow significantly faster than wages.

Inflation interest

Inflation fears manifested themselves at the last meeting of the Monetary Policy Council (RPP), which surprised analysts by raising interest rates by 25 basis points at the end of June. Most analysts had expected the rate rise after RPP's July meeting, at the earliest. But with inflation already edging higher than expected - at the end of May inflation stood at the central bank's target of 2.5 percent, while experts had predicted a slightly slower 2.1 percent - the RPP felt it had to make a move.

The rate hike will most likely not be the last from the RPP this year. RPP member Halina Wasilewska-Trenkner estimates that there is a 50-percent chance that the Council will raise rates again in 2007.

"We will be closely watching all changes in macroeconomic factors and if the need to counterbalance the price increase appears, we will reach for the tools at our disposal," she said.