beyondbrics

Poland has clocked in a 3.8 per cent growth rate in 2010, one of the highest in the European Union, according to the country’s statistical agency.

The higher-than-expected result was due in large part to strong domestic demand, with private consumption rising by 3.9 per cent as consumers rushed to buy goods before this year’s scheduled VAT rise. But investment fell by an unexpected 2 per cent, a worrying sign for the country’s future growth prospects.

The numbers will ease fears about the sustainability of Poland’s fiscal position. The deficit for 2010 is expected to be around 8 per cent of gross domestic product and public debt is approaching 55 per cent of GDP.

Taking GDP growth in 2009 (1.7 per cent) and 2010 together, the Finance Ministry has stressed that Poland is still the only EU country to grow in each of the two years.

But analysts are nevertheless becoming nervous about the lack of root-and-branch fiscal reforms.

“Poland’s public finances are on an unsustainable trend and we have become increasingly concerned about it for some time,” Ed Parker, Fitch’s head of Emerging Europe sovereign ratings, said in Warsaw earlier this week.

In an interview with today’s Gazeta Wyborcza newspaper, Witold Kozinski, the deputy head of the Polish central bank, acknowledged that the outside world is looking very closely at Poland.

“If the critical view of Poland ‘s public finances becomes entrenched in our neighbourhood, that will have an effect on foreign investors. For example, the zloty could weaken,” he said.

Poland’s economy is expected to expand by about 4 per cent in 2011, thanks to strong domestic demand and an increase in investment, which are likely to be boosted by the hosting of the 2012 European football championships by Poland and Ukraine.

Neil Shearing, emerging markets economist with Capital Economics, says:

For now at least, the good news is that the crisis in the euro-zone has allowed Poland’s growing twin deficits to pass under the radar. But policymakers are taking a gamble. Maintaining the country’s position as Eastern Europe’s star performer will require deep-seated fiscal and structural reforms – and a more reform minded government to boot.