Poland to take leading role on European economic stage (Feature)

By Andrew McCathie Sep 17, 2010, 16:59 GMT

Berlin - Poland is set to take on a leading role on Europe's economic stage amid signs of solid growth and the prospects of a pickup in private investment and consumer spending.

Powered by the upswing in neighbouring Germany, industrial production came in at a more-than-forecast 13.5 per cent year-on-year in August, faster than the 10.5-per-cent growth recorded the previous month. Economists had forecast a 13.1- per-cent rise in August.

'Germany is Poland's economic engine,' said Mateusz Szczurek, ING Bank chief economist in Poland. 'It's now time for companies and households in Poland to take the lead in economic growth.'

About one quarter of Poland's exports are sent across the border into Germany.

Economists expect Polish economic growth to top 4 per cent next year after the European Commission forecast this week that the economy would expand by a 3.4 per cent in 2010.

Polish imports surged by 18.2 per cent in the second quarter, highlighting the country's growing economic strength and potential for helping to underpin the European economy.

As had been the case in Germany, Poland's success in keeping labour costs in check has been key to helping what is Central Europe's biggest economy to remain on a growth track.

But, unlike Germany and almost every major western nation, Poland managed to head off lurching into recession last year with economic growth churning away at 1.8 per cent.

The economic expansion has to a large extent being buoyed by a sharp rise in public investment, which in turn has helped to offset a decline in private sector investment following the sharp contraction in the global economy.

Now, the challenge facing economic policy-makers in the coming months is to encourage private companies to boost investment and for consumers to open up their wallets at a time when world economic growth is projected to lose momentum.

Along with this, Poland also faces the task of rolling back its deficit and public debt levels, which have ballooned as Warsaw has pumped public money into the economy via its infrastructure development campaign.

Economic forecasters are expecting Poland's budget deficit to climb to about 7.5 per cent of gross domestic product (GDP) this year compared with 7.1 per cent in 2009.

This is well above the 3-per-cent mark, which is often used as a yardstick for European deficit levels. Poland's public debt stands at 55 per cent of GDP.

Rolling back the deficit is likely to be made that much easier by a large number of the publicly funded infrastructure projects coming to an end by 2012 and 2013.

But the question is whether the private sector and consumers will be prepared to take up the slack once the economy's public sector life support system is turned off.

Highlighting the likely impact on Poland of a slowdown in both the German and world economies, Polish export growth is projected to average about 15 per cent next year after bounding ahead by about 20 per cent in 2010.

Certainly, the private sector appears to have weathered the financial firestorm that swept the global economy following the implosion of the US investment bank Lehman Brothers two years ago.

Company profits are at record levels. But the sense of economic uncertainty now emerging around the world has made companies hesitant about investing and hiring.

The number out of work has been slowly edging down from about 12 per cent during the economy's fast-paced expansion in 2007.

But data to be released next week is forecast to show unemployment in August still hovering around 11.4 per cent, despite the hefty public sector investment outlays, which last year totalled 2 per cent of GDP.

Neverteless, domestic demand has been helping to drive growth. Domestic demand grew by 3.9 per cent during the three months to the end of June.

Economists are predicting that private consumption could grow by about 3.7 per cent in 2011 after expanding by 2.8 per cent this year.