_________________________________________________________________________________________________________________________________________________________ Country Report Poland November 2012 Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom _________________________________________________________________________________________________________________________________________________________ The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For 60 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. 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ISSN 2047-5640 Symbols for tables "0 or 0.0" means nil or negligible;"n/a" means not available; "-" means not applicable Poland 1 Poland Forecast Highlights Outlook for 2013-17 2 Political stability 3 Election watch 3 International relations 3 Policy trends 4 Fiscal policy 4 Monetary policy 5 International assumptions 6 Economic growth 7 Inflation 7 Exchange rates 7 External sector 8 Forecast summary Data and charts 9 Annual data and forecast 10 Quarterly data 10 Monthly data 12 Annual trends charts 13 Monthly trends charts 14 Comparative economic indicators Summary 14 Basic data 16 Political structure Recent analysis Politics 18 Forecast updates 19 Analysis Economy 23 Forecast updates 35 Analysis Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 2 Highlights Editor: Katya Kocourek Forecast Closing Date: November 1, 2012 Outlook for 2013-17 The centre-right Civic Platform (PO) of the prime minister, Donald Tusk, has a small yet workable majority in parliament and is expected to remain in power until the next parliamentary election, in 2015. Increasing opposition from the right-wing Law and Justice (PiS) could serve to undermine the authority of the government, particularly over the pace of fiscal reform. The general government deficit, calculated according to EU harmonised (ESA 95) methodology, is forecast at 3% of GDP in 2013, shrinking from 5.1% in 2011 and an estimated 3.7% in 2012. Real GDP grew by 4.3% in 2011, driven by strong domestic demand and exports. We estimate it to decelerate to 2.4% in 2012. Export growth will be slow, owing to a recession in the euro zone and weak domestic demand. Inflation is estimated to remain high in 2012, at an average of 3.6%, stoked by the volatility of the zloty. It is expected to fall to an annual average of 2.7% in 2013-17, within the target range set by the central bank. The current-account deficit is expected to continue shrinking in 2012, to 3.8% of GDP, as the impact on imports of weak domestic demand outweighs the impact on exports of weakening external demand. Review For the first time in five years, the main right-wing opposition party, Law and Justice (PiS), has moved ahead of the PO in the opinion polls. Relations between the two parties remain tense. In his keynote parliamentary speech in mid-October, Mr Tusk announced a growth stimulus package for the economy, which includes new fixed investment and the diversion of privatisation revenue to the budget. Consumer price inflation stabilised in September. At 3.8% year on year, it was unchanged from August, despite higher fuel prices. Seasonally adjusted industrial output dropped by 1.4% year on year in September, in the first notable decline since September 2009. Seasonally adjusted construction output fell by 9.5% year on year in September, and continues to act as a drag on headline growth. In the 12 months to August the current-account deficit narrowed to Zl 63.5bn (US$19bn; around 4.1% of GDP) from Zl 74.5bn (4.9% of GDP) in 2011. Outlook for 2013-17 Political stability A two-party coalition government, in power since the parliamentary election in October 2011, holds a small but workable majority in parliament. The coalition comprises the centre-right Civic Platform (PO), the largest party, and the rural-based Polish Peasants' Party (PSL). The PO leader, Donald Tusk, governs as prime minister in a second consecutive term in office. The opposition is divided between the conservative Law and Justice (PiS), the Democratic Left Alliance (SLD), and Palikot's Movement (RP), led by Janusz Palikot. The SLD emerged from the election politically weakened, and it is no longer the dominant party of the centre-left. The Economist Intelligence Unit expects Poland to be governed by a coalition throughout the forecast period. The constitution is designed to protect incumbent governments from early dismissal, thereby buttressing political stability. The president, Bronislaw Komorowski, comes from the PO, which favours the stability and continuity of a PO-PSL pairing. If a PiS-led administration were to return to power, it would probably be unstable, not least because cohabitation between a PiS-led government and Mr Komorowski would create considerable legislative uncertainty and ideological divisions. However, a coalition government formed between the PiS and other centre-right and centre- left parties could produce a more stable alliance in the medium term. Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 3 Election watch Poland faces three important elections during the forecast period. An election to the European Parliament is scheduled for mid-2014. The next general election is scheduled for late 2015. The possibility of voter weariness with the PO by 2014-15 could facilitate Mr Tusk's decision to run for the presidency in 2015. The PiS has regrouped following the parliamentary election in 2011. Its efforts to appeal to potential new voters appear to be yielding results, and its popularity ratings are rising. However, recent defections from the party have resulted in the formation of a new parliamentary faction, United Poland. The PiS could eventually provide a stronger challenge to the PO, particularly if its popularity ratings continue to rise steadily. The left-wing SLD suffered its worst recorded defeat in October 2011. It will need to rebuild its voter base, focusing on boosting support from the growing urban middle class. International relations Poland's presidency of the EU ended in December 2011. The government will seek to increase Poland's influence within the EU, advocating deeper European integration. In March 2012 Poland (alongside 24 other EU members) signed the new EU fiscal treaty encouraging budgetary responsibility. Poland appears to be supportive of the German stance on fiscal austerity. It is also favours new pan-European initiatives proposed by the European Commission, such as the creation of a banking union. The government will lobby hard to preserve the flow of EU funds to Poland in the EU budget for 2014-20, although it is highly unlikely to secure as much as it did in the previous budget round. The government has worked hard on the issue of restoring Polish-Russian diplomatic relations following the Smolensk air crash in April 2010, as part of its attempt to shed Poland's anti-Russian image within the EU, and so shore up its alliance with France and repair strained ties with Germany. Nonetheless, disagreements over the Nord Stream pipeline will continue to blight Polish-Russian relations. The security relationship between Poland and the US should remain close, although Poland's readiness to participate in future NATO-led missions could wane. Policy trends Economic policy in the immediate future is likely to be preoccupied with demonstrating fiscal prudence in order to bolster market confidence and demonstrate creditworthiness. This will be important to facilitate the continued servicing of loans without resorting to the flexible credit line (FCL) with the IMF, which is worth US$29.5bn and is due to expire in early 2013. However, with the recent announcement of fiscal loosening in the short term, the government's main preoccupation will be to encourage domestic stimulus for economic growth.