Polish Economic Funk Seen Worsening in Challenge for Budget

Updated on
  • Economic growth to stall at 3.3% through 2018, survey shows
  • Government needs stronger GDP gains to finance social spending

Poland’s economy is on track to languish for three years as analysts cut their growth forecasts for 2016 and 2017, in a sign the government’s plans to hold the deficit within European Union limits are becoming increasingly unrealistic.

Gross domestic product will expand 3.3 percent this year and next, from earlier predictions of 3.4 percent and 3.5 percent, and remain at the same level in 2018, according to the median estimates in a Bloomberg survey conducted Aug. 19-24. Next year’s budget deficit will increase more than previously projected and widen to 3.1 percent of GDP from 2.9 percent in 2016, reaching 3 percent the following year, it showed.

The outlook calls into question the government’s ability to hold the budget shortfall below the EU’s 3 percent threshold and ensure the flow of 82.5 billion euros ($93 billion) in the bloc’s development funds earmarked for Poland through 2020. On Thursday, the nine-month-old cabinet approved a draft budget that already includes downwardly revised economic forecasts.

“A higher deficit is a possible threat in light of further deterioration in investment, leading to slower economic growth,” said Jacek Adamski, an analyst at Poland’s Lewiatan Employers’ Association. “It’s not about a continuation of this year’s fiscal stimulus. Next year’s budget in fact reinforces it, raising the question of whether the economy will withstand it.”

Less Optimism

The government, which recently said growth may accelerate to 5 percent next year, has conceded the economy is stumbling after a preliminary reading for second-quarter GDP showed a gain of 3.1 percent. That missed estimates for 3.3 percent growth and barely improved on the first three months, when output rose 3 percent, the worst since the fourth quarter of 2013.

The Finance Ministry now sees next year’s deficit at 2.9 percent even after revising its economic growth forecast to 3.6 percent from 3.9 percent.

The government has signaled that economic hurdles won’t keep it from delivering on costly campaign pledges, including higher spending on social welfare. While a program of child benefits has already been implemented this year, the challenge in 2017 is also to fund measures that range from lowering the retirement age and increasing public wages to providing free medicines for senior citizens and increased outlays on defense.

‘Fully Credible’

“We will pursue our political plans while keeping public finances safe,” Finance Minister Pawel Szalamacha said at a news conference after the government meeting in Warsaw. “We really stand strong. Our budget plan appears fully credible to investors.”

The zloty dropped after Szalamacha’s spoke and traded 0.5 percent weaker at 4.3290 versus the euro, the lowest since Aug. 1, at 5:06 p.m. in Warsaw. The yield on Poland’s 10-year government bond fell two basis points to 2.68 percent.

Labor Minister Elzbieta Rafalska said on TV Republika on Thursday that next year the government will have to spend “several hundred million” zloty more on child benefits than the planned 22 billion zloty ($5.8 billion). Rafalska said she couldn’t “imagine that Poland may drop the plan as long as the current government of Law & Justice is in power.”

The benchmark interest rate will only be increased by a quarter point in 2018 as price growth accelerates to 1.6 percent next year after deflation of 0.6 percent in 2016, according to the survey. That’s at odds with central bank forecasts that see prices declining 0.5 percent this year, before inflation returns and reaches 1.3 percent in 2017.