In many respects the economy has weathered this period reasonably well. Also, Poland has proven resilient to episodes of negative investor sentiment towards emerging markets. Through 2001, demand will be boosted by the projected gains in the terms of trade as international oil prices fall, as well as some household spending out of one-off transfers, including the compensation for the unanticipated decline in real pensions in 2000. But demand growth will likely be dampened by the effect of unemployment on wage settlements and precautionary savings, further falls in employment, as well as the high level of interest rates and the anticipated fiscal consolidation. With export growth projected to slow compared to 2000 owing to the lagged effects of the strong zloty and some deceleration in export markets, the contribution to economic growth from net exports will weaken moderately.
Recent evidence suggests that inflation is already on a downward track.
Even if the monthly rate falls no further through end-2001, headline inflation would fall towards the bottom of the target range. But high real interest rates and a reduction in the economic deficit are likely to slow price growth further so that inflation could well fall below the target range. The key unknown factor in the benign inflation trend in the near term is prospects for nominal wage growth. This outlook presents considerable difficulties for the formulation of fiscal policy. The proposed budget targets an economic deficit of 1.6 percent of GDP in 2001, from an estimated outturn of 2.5 percent in 1999.