2013-09-17 08:56:22 - New Country Reports research report from Business Monitor International is now available from Fast Market Research
While we are forecasting relatively robust economic activity over the medium-term, high unemployment and stagnant real wages will continue to weigh on real GDP growth.
Poland's external position remains relatively strong. We forecast the current account deficit to narrow from 4.3% of GDP in 2011 to 2.5% in 2013 as the economic slowdown reduces import demand.
However, a large stock of foreign-owned government paper and ongoing private sector deleveraging represent the two major risks to our sanguine outlook.
We continue to expect the Civic Platform (PO)-led government to serve out its term. The government won a recent parliamentary vote of confidence, suggesting its parliamentary majority is safe for the time being. We also believe that the opposition will struggle to broaden its
appeal despite the rising government unpopularity, limiting its ability to challenge the ruling coalition.
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Major Forecast Changes
In light of the disinflationary environment and a sharp deceleration in domestic demand, we have revised down our fiscal deficit projections, which we now expect to arrive at 4.0% in 2013 and 3.6% in 2014. Despite our expectations for Poland to miss the EU's 3.0% of GDP budget target this year, Poland will likely avoid punishment under the exceptional growth clause which permits some leeway on targets due to very low annual growth
Due to weak domestic demand, we have revised our current account forecasts for 2013, and now expect the current account deficit to arrive at 2.5% of GDP from a previous forecast of 3.1%.
Low inflation and slowing growth have paved the way for further monetary easing, and we now forecast 75 basis points of cuts to the base rate in 2013, bringing it to 2.50% by year-end.
Key Risk To Outlook
Although not our core scenario, we highlight the risk of Greece leaving the euro, potentially leading to a disorderly breakup of the whole common currency bloc. This would likely push Poland into recession.
Partial Table of Contents:
Key Risk To Outlook
Chapter 1: Political Outlook
BMI Political Risk Ratings
Economic Slowdown Creates Challenges For Tusk
- While popular support for the Civic Platform-led government has fallen to all time lows, and is now polling lower than opposition party Law and Justice, we maintain our expectation for the government to serve out its term. Improvements in the labour market and economic activity should help to bolster support for the government in the second half of the year, although the razor-thin parliamentary majority remains a challenge.
Long-Term Political Outlook
A Maturing Regional Power
- We consider Poland's long-term political risk profile to be on an upward trajectory, reflecting the country's maturing political institutions and greater confidence in the conduct of external affairs. Solid macroeconomic fundamentals underpin our expectation for improvement over the long run. Nevertheless, Poland still faces significant challenges to political stability in its external relations and at home.
Chapter 2: Economic Outlook
BMI Economic Risk Ratings
Middle Income Trap Overshadows Recovery
Balance Of Payments
Cyclical Factors Obscure Structural Trend
- Despite Poland's current account posting its second consecutive surplus, we maintain our forecast for a deficit this year. Although we have revised up our figures slightly to 2.5% of GDP, from a previous forecast of 3.1%, we regard the recent trends as being cyclically driven, and expect the surplus to prove transient once domestic demand recovers towards the end of the year.
Wider Budget Deficits, But Credibility Intact
- In light of weaker-than-expected government revenues, we have adjusted down our forecast for Poland's fiscal deficit in 2013 and 2014, and now expect the deficit to arrive at 4.0% of GDP and 3.6% of GDP respectively. However, the causes of the wider deficit are primarily cyclical rather than structural, and the government continues to make progress on structural consolidation.
TABLE: MAIN BUDGETARY MEASURES
Fiscal Stimulus To Usurp Monetary Easing
- Despite consumer prices heading close to deflationary territory, we do not expect the National Bank of Poland to make any more rate cuts this year, as we believe doing so could further weaken bank profitability by lowering net interest margins, acting as a disincentive to lending and creating tighter lending conditions in practice. The recent round of monetary easing has yet to yield any tangible increases in aggregate demand, and the announcement that the government is planning to increase spending suggests that fiscal stimulus is about to overtake monetary easing as the authorities preferred tool.
PLN: Maintaining Medium-Term Bearish Bias
TABLE: CURRENCY FORECASTS
Chapter 3: 10-Year Forecast
The Poland Economy To 2022
Long-Term Future Looks Bright
- We forecast Polish real GDP growth to average 3.2% between 2013 and 2022, down slightly from 4.0% between 2001 and 2011. Poland is well placed to avoid the pitfalls of the middle income trap and continue benefitting from large catch-up growth with the rich EU economies.
Full Table of Contents is available at:
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