Poland Needs Policy Easing to Avoid Recession, Adviser Says
Aug. 10 (Bloomberg) - Poland, Europe’s fastest-growing economy outside the Baltics, may slip into a recession unless the central bank cuts rates and deficit goals are eased, said Boguslaw Grabowski, an economic aide to Premier Donald Tusk.
“Events in the Eurozone and the European Commission’s demand to curb the budget deficit have caught us in a vise,” Grabowski said in an interview in Warsaw Thursday.
“We simply must extend the timetable of deficit reduction as the current plan could be disrupted by a significant slowdown or even a recession whose causes are completely beyond our control.”
Poland’s central bank, the only one in the European Union to raise rates in 2012, must first “relent on its restrictive stance” and reduce borrowing costs as that’s “the main tool to curb the effects of slower growth,” said Grabowski, who was a member of the Monetary Policy Council from 1998 to 2004.
Poland, forecast by the Brussels-based commission to expand the most in the EU this year, is seeking to cut the budget gap to within the bloc’s limit of 3 per cent of gross domestic product in 2012. Failing to do so may cost Poland access to development grants that helped it become the only member of the 27-nation EU to avoid a recession in 2009.
Previous pledge
Earlier this year, Tusk’s government pledged to reduce the shortfall to 1 per cent of GDP in 2015, a goal that assumes the economy will accelerate in coming years after slowing to 2.5 per cent this year from 4.3 per cent in 2011.
Poland will revise its 2013 draft budget at the end of this month, Ludwik Kotecki, chief economist at the Finance Ministry, said in an interview Radio Tok FM on Wednesday.
“The fact the economy is slowing should not be a big surprise,” Piotr Kalisz, chief economist at the Polish unit of Citigroup, said in a note Friday. “The change in the tone of Polish government officials is something new and we believe this might be the first attempt to prepare the public opinion for uncertainty regarding future slowdown and for likely changes in growth forecasts.”
Poland’s being “buffeted by stronger external shocks” and “we need to assume GDP growth will slow” next year, Grabowski said. “We could even have a sudden stop if political and institutional convulsions in the Eurozone continue for the next year, as seems likely,” he said.
Poland plans to reduce its deficit to 2.9 per cent this year, within the EU ceiling for the first time since 2007 and down from 5.1 per cent last year. The gap was 7.8 per cent in 2010 and the government assumes it will shrink to 2.2 per cent next year.
No appetite
“Taking into account the large size of fiscal adjustment in previous years, we doubt the government would have appetite for any additional painful adjustment,” Kalisz said.
The zloty lost 0.4 per cent to 4.0782 per euro at 1pm in Warsaw, extending its decline since Monday to 1 per cent, the steepest among more than 20 emerging-market currencies tracked by Bloomberg. The yield on 10-year notes rose five basis points to 4.99 per cent, increasing 26 basis points this week for the biggest weekly jump since Nov. 25.
Grabowski said the government should give itself more time to reduce the deficit to 1 percent. Poland’s economy will probably slow to 1.5 percent to 2 percent next year as the debt crisis sends the 17-nation euro region deeper into recession, he said.
“Fiscal and monetary policies can’t be tightened simultaneously while the EU is undergoing a crisis of this scale, and yet that’s what we’re doing,” Grabowski said.
Holding Steady
While central banks across the world are undertaking the broadest reduction in borrowing costs since 2009 to avert a global slump, the Narodowy Bank Polski is keeping interest rates at their highest since 2009 for a second year. The bank raised its interest rates by a quarter-point in May to 4.75 per cent as inflation has remained above the central bank’s 2.5 per cent target since October 2010.
Poland, which ditched communism in 1989 and joined the EU in 2004, must expand as much as 3 percentage points more than western Europe’s annual pace to catch up with the “old” EU, according to Grabowski.
“If the central bank eases its policy, while the government scales back fiscal cuts and concentrates on deregulating the labor market, then it should be possible to keep our economic growth 2.5 percentage points faster than the euro area’s,” said Grabowski, who also heads Skarbiec Asset Management Holding, which oversees about $1.5 billion of assets.
“These steps should also preserve Poland’s reputation as a safe investment destination.”
