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government manages to keep the state budget deficit in check, we do not expect the overall budget deficit to return to within the Maastricht threshold of 3% of GDP until well after the end of the forecast period as the deficits in the other components of the consolidated budget (particularly the health and pension funds) prove difficult to rein in. Monetary policy The previous monetary policy council (MPC) of the National Bank of Poland (NBP, the central bank) cut official interest rates by a total of 250 basis points between November 2008 and June 2009, to an all-time low of 3.5%. A new MPC took office in February 2010, and no further policy easing is expected in the current cycle. The MPC is likely to shift its concern to the possible mediumterm effect of loose monetary policy on inflation, although this shift will be gradual owing to lingering concerns about the solidity of the economic recovery. As a result, we do not expect the MPC to begin raising interest rates until late 2010. The NBP will gradually drain excess liquidity from the banking system first. A new NPB governor is likely to be appointed by mid-2010 to replace Slawomir Skrzypek, who died in the aeroplane crash in April. The new governor is likely to stress policy continuity. Although it remains non-committal, the government appears to have set its sights on euro adoption in 2015, meaning that the zloty need not enter ERM2 until some time in 2012. This should ease to some degree the uncertainty attached to the outlook for monetary policy, at least in the short term. However, towards the end of the forecast period, pressure on the MPC to promote a sustained rate of disinflation will increase (requiring a more pronounced rise in policy rates), both in order to ensure that Poland meets the Maastricht inflation criterion in the early 2010s and to reduce possible strains on the zloty.

Economic forecast
International assumptions
International assumptions summary
(% unless otherwise indicated) 2008 Real GDP growth World EU27 Euro area Germany Exchange rates US$: SDR:US$ Financial indicators 3-month interbank rate US$ 3-month Libor Commodity prices Oil (Brent; US$/b) Natural gas (Europe; % change in US$ terms) Food, feedstuffs & beverages (% change in US$ terms) Industrial raw materials (% change in US$ terms) 2.8 0.7 0.5 1.3 1.47 0.63 4.65 2.91 97.7 56.7 28.3 -5.1 2009 -0.8 -4.2 -4.1 -5.0 1.39 0.65 1.23 0.69 61.9 -35.0 -20.4 -25.6 2010 4.1 0.8 0.7 1.1 1.30 0.67 0.68 0.64 80.2 -5.4 -2.8 35.6 2011 3.5 1.0 0.8 1.2 1.22 0.68 0.85 0.93 78.5 -1.5 -1.6 2.7

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

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World GDP contracted sharply in 2009, by 0.8% at purchasing power parities (PPP), with only a weak recovery likely in 2010. Real GDP in the euro zone, the most important market for Polish exports, fell by 4.1% in 2009 and is forecast to recover only gradually in 2010-11. Our core forecast now assumes that the US dollar will strengthen markedly during 2010-11, as markets concerns persist about the fiscal sustainability of several euro area countries, and as we now expect the European Central Bank (ECB, the euro area's central bank) to start raising its benchmark rate only in 2012. Average oil prices are forecast to rise to US$80/barrel in 2010 from US$62/b in 2009 as world economic conditions improve. We expect oil prices to fall only modestly in 2011 as an increase in non-OECD demand offsets a small reduction in OECD demand for oil. Economic growth
Gross domestic product by expenditure
(Zl m at constant 1995 prices where series are indicated; otherwise % change, year on year) Private consumption Public consumption Gross fixed investment Final domestic demand Stockbuilding Total domestic demand Exports of goods & services Imports of goods & services Foreign balance GDP 2008 a 364,376 5.9 c 99,637 7.5 c 160,574 8.2 c 624,586 6.7 10,824 -1.3 d 635,411 5.3 c 280,953 7.1 c 290,115 8.0 c -9,162 -0.5 608,028 5.0 c 2009 a 372,756 2.3 c 101,530 1.9 c 159,931 -0.4 c 634,218 1.5 -7,387 -3.0 d 626,831 -1.4 c 258,476 -8.0 c 250,949 -13.5 c 7,527 2.7 618,972 1.8 c 2010 b 376,521 1.0 102,545 1.0 167,060 4.5 646,127 1.9 2,000 1.5 d 648,127 3.4 272,650 5.5 267,594 6.6 5,056 -0.4 637,704 3.0 2011 b 385,282 2.3 103,981 1.4 176,622 5.7 665,886 3.1 4,000 0.3 d 669,886 3.4 289,068 6.0 284,172 6.2 4,897 0.0 659,303 3.4

a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual. d Contribution to real GDP growth (as a percentage of real GDP in the previous year).

According to the Central Statistical Office (GUS), real unadjusted GDP grew by 1.8% year on year in 2009 as net foreign trade exerted a positive impact on economic activity. We expect GDP growth to accelerate to 3% in 2010 (previously forecast at 2.8%) as fixed investment picks up and a measure of restocking takes place, and 3.4% in 2011 as private consumption recovers. However, we still expect labour and credit markets to remain relatively subdued over the forecast period, preventing a stronger recovery in GDP growth. In 2010 a weak labour market is expected to undercut private consumption. In 2011 recovering employment and private-sector lending will allow private consumption to grow more strongly. Budget constraints will limit the growth in public consumption in both years. Private business investment will recover from 2010, after a small contraction in 2009 under the weight of tighter credit

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and falling corporate profitability. Business investment should feel the positive effect from 2010 of an expected rise in spending on EU-supported infrastructure projects, and of a gradual pick-up in greenfield foreign direct investment (FDI). The Euro 2012 football championships, which Poland will co-host with Ukraine, will also boost construction spending, particularly in the run-up to the championships in 2011. Although exports should return to growth from 2010, foreign trade is forecast to exert a net drag on growth in 2010, and be neutral in 2011, as recovering domestic demand sucks in imports. Risks to the outlook look broadly balanced. On the one hand, the financial position of Polish households and the government will remain less sound than before the crisis for some time. This means that they would not be able to provide the same level of support to the economy as in 2009, should weakness or instability return to the world economy in 2010-11. On the other hand, the economy has thus far displayed a degree of resilience to the global downturn, which could lead it to grow faster than we forecast now that a global recovery appears to be in place. Inflation Higher food and energy price inflation, caused in part by sharp currency depreciation, as well as some resilience in domestic demand, limited the fall in average headline inflation in 2009. However, a downward trend is belatedly under way. Slower wage growth than in recent years, as a number of Poles have returned from working abroad, should have a disinflationary effect from 2010, allowing the average annual rate of inflation to fall to 2.7% in 2010 and 2.4% in 2011 (from 3.5% in 2009). Gradually tighter monetary policy should also have a disinflationary effect, although some residual uncertainty regarding the path of regulated energy prices could cause some volatility. The zloty has partially rebounded since depreciating markedly in late 2008 and early 2009. However, a weakening (and increased volatility) in the zloty and other regional currencies in April-May 2010 underscored the continuing fragility of investors' sentiment towards east-central Europe. Given the greater size and depth of Polish financial markets relative to their regional peers, international investors will continue to regard Polish financial assets as a proxy for the wider region, thus increasing their volatility. Furthermore, investors will concentrate on the Polish government's efforts to consolidate the public finances, and (later) on the country's progress towards meeting the Maastricht criteria for euro adoption. As a result, although our central forecast is that the zloty will strengthen modestly on average against the euro in 2010-11, it is likely to suffer bouts of volatility. There is still a risk that the zloty could weaken if investors perceive that the government is facing difficulties in reaching its goals. This uncertain background, as well as a diminished perception of the euro as a safe haven in the wake of the Greek fiscal crisis, explains the government's likely decision to postpone the target date for euro adoption to 2015 (or possibly beyond). The government had previously entertained the notion of entering ERM2 before the legal and constitutional changes necessary to allow Poland to adopt the euro are in place. However, the postponement of the target date all but eliminates the urgency to take such a course of action. We therefore now expect the zloty's entry into ERM2 to be delayed until financial market stability

Exchange rates

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is more entrenched and a clearer picture has emerged around the state of the public finances. This may not occur until after the end of the forecast period. External sector The current-account deficit contracted to 1.7% of GDP in 2009 as the trade deficit in particular narrowed markedly year on year. In 2010-11 the current-account deficit is forecast to widen, both in absolute terms and as a share of GDP, as domestic demand recovers, energy prices rise and the profitability of foreignowned enterprises increases. Capital markets are expected to remain relatively fragile, at least in 2010, raising residual concerns that Poland could find it expensive to finance its external deficits over the forecast period. We nevertheless expect that the financing requirement will be met mainly through a combination of debt issuance and rollover. The FCL is likely to be renewed to mid-2011, although given the large stock of foreign-exchange reserves, it is unlikely that Poland will draw on the FCL barring extreme distress on financial markets. Inflows of FDI are expected to recover to some degree in 2010-11 as global investors' sentiment makes only gradual and uneven progress.
Forecast summary
(% unless otherwise indicated) Real GDP growth Industrial production growth Gross fixed investment growth Unemployment rate (av) Unemployment rate (av; EU standardised measure) Consumer price inflation (av; national measure) Consumer price inflation (year-end; national measure) Consumer price inflation (av; EU harmonised measure) Short-term lending rate State budget balance (% of GDP) General government balancec (ESA; % of GDP) Exports of goods fob (US$ bn) Imports of goods fob (US$ bn) Current-account balance (US$ bn) Current-account balance (% of GDP) External debt (year-end; US$ bn) Exchange rate Zl:US$ (av) Exchange rate Zl:US$ (year-end) Exchange rate Zl: (av) Exchange rate Zl: (year-end) 2008 a 5.0 2.7 8.2 9.8 7.1 4.2 3.3 4.2 9.1 -1.9 -3.7 178.7 204.7 -26.8 -5.1 218.0 2.41 2.96 3.54 4.12 2009 a 1.8 -3.8 -0.4 11.0 8.2 3.5 3.5 4.0 8.5 -1.8 -7.1 139.5 144.3 -7.2 -1.7 239.2 d 3.12 2.85 4.35 4.09 2010 b 3.0 7.0 4.5 12.5 10.0 2.7 2.7 2.9 8.6 -3.0 -6.7 153.6 165.2 -13.5 -3.0 250.8 3.12 3.13 4.05 3.88 2011 b 3.4 8.5 5.7 11.0 8.5 2.4 2.7 2.4 8.0 -2.7 -5.6 168.2 185.6 -15.7 -3.4 255.2 3.14 3.10 3.84 3.72

a Actual. b Economist Intelligence Unit forecasts. c In line with Eurostat recommendations, excluding the open pension funds from the government sector. d Economist Intelligence Unit

estimates.

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