When mapping out their financial plans for 2010 and investment plans for coming years, Polish businesses still have great difficulty evaluating business risk. However, this task is generally easier now than a year ago because sentiment, both globally and in Europe, has clearly improved among a majority of the main actors: households, businesses and decision-makers. The crisis in the US and EU financial sector was deep and potentially very dangerous. But this sector has now seen the strongest improvement – confidence has been restored, and most banks and other financial institutions have again become profitable. As I had expected a year ago, recession in the global real economy turned out to be quite shallow, though painful to some industries. In Poland, only some segments of the manufacturing industry slid into recession and its scale was smaller compared to neighbouring countries.

On the other hand, the state of public finances deteriorated considerably, or even dangerously, in some countries including Poland. The United States and Britain additionally saw a very sharp increase in the supply of base money, which may lead with time to a major increase in inflation and interest rates in these countries.

In order to make business risk evaluation for 2010 easier, I propose we assume that the macroeconomic situation will develop as follows:

1.
In highly developed countries – the United States, European Union and Japan – the real economy contracted from mid-2008 to mid-2009, with GDP down by around 5-6% and industrial production down by around 10-20%. Since mid-2009 we have seen stabilisation, with a slight improvement in some areas of activity. In 2010 one may expect further improvement, though at a very moderate pace because there will still be significant uncertainty. The natural rate of growth in industrial production in these countries is at around 4-5% while the natural GDP growth rate is around 1-2% in the EU and Japan and 2-3% in the United States. In the United States, the growth rate is higher due to a higher population growth and consequently a higher labour supply growth. In the course of 2010 we may see a return to this natural growth rate. But the unemployment rate and spare production capacity will continue to be high.

2.
Low base and market interest rates on loans, coupled with a moderate level of raw material prices, will still be factors behind an improvement in economic conditions. Deflation will be replaced by inflation. However, it will stay at a low and safe, or optimum, level of around 1-2%. Sentiment will be improving as stock and home prices will stop declining.

3.
It seems that the main threat in the coming several years is that of another macro-financial destabilisation in the United States, where a combination of low national savings, very high budget deficits and the strong expansion of the monetary base is an explosive mixture. The credibility of the US economy is still very high in the world. Otherwise, one could expect a further strong devaluation of the dollar to the euro and yen, an increase in inflation, a strong rise in interest rates, and another recession as early as 2011-2012. Financial markets expect that a reasonable exit strategy, reducing the risk of such destabilisation, will be proposed in 2010 by the Federal Reserve and President Obama.

4.
In Europe, the strongest improvement in 2010-2011 should be noted by the countries which had seen the sharpest declines in activity, in particular all countries of the former Soviet Union, several Central European countries to the south of Poland and Germany.

5.
In Poland, it is normal for GDP to grow by around 4.5-5% annually and manufacturing production by around 8-10% annually. Meanwhile, in 2009-2010 the GDP growth rate will reach around 2% annually – around 1.5% in 2009 and around 2.5% in 2010. This means that by the end of 2010 the cost of the global crisis for Poland will be equivalent to around 5-6% of its GDP and a drop in manufacturing production by around 15-18% compared to the level we would have recorded if it had not been for the crisis. Therefore, at the end of 2010 this cost will only be slightly lower that the average cost for EU countries. This relatively small difference to Poland’s advantage is due to a much lower ratio of household and business loans to GDP in the country, its expansive fiscal policy just before the crisis and a strong depreciation of the zloty to the euro and dollar in the course of the crisis.

The cost will stay at a similar level in 2011, when Poland is likely to return to its natural GDP growth rate of around 4.5%. If there is no more turbulence in the global economy the consequences of the global crisis will disappear in Poland in 2012-2014. In this period, the country would record high economic activity, with a growth rate of around 6%. The years 2012-2014 would have their equivalents in the past – the periods from 1995 to 1997 and from 2006 to 2008, when the capacity for growth built up in the preceding years of poorer economic climate was released.

6.
Thanks to the strong devaluation of the zloty to the euro and dollar, corporate profitability did not fall as sharply as in the years 2000-2002, when the zloty had appreciated sharply to the euro. As a result, the pressure on businesses to cut employment and investment is much weaker now. A year ago, I expected a slightly larger decrease in private investment. My unemployment rate predictions have largely come true. The official unemployment rate will still be increasing but should not exceed 14-15%, against around 8-9% just before the crisis and around 20% at the peak of the previous economic slowdown.

7.
This year inflation was slightly higher in Poland than in other countries, mainly due to a weak zloty. The expected appreciation of the Polish currency in the course of next year should bring the inflation rate to a level close to the central bank’s inflation target. However, the absence of an upward pressure on wages may persuade a newly appointed Monetary Policy Council to keep interest rates at the present level throughout most of 2010. The anticipation of the zloty’s appreciation may lead to a sharp increase in euro-denominated loans. In this case, it may be impossible for the Monetary Policy Council to keep the Polish interest rate well above the euro rate.

8.
The development of the situation in the public finance sector will have a large impact on the zloty exchange rate and consequently on inflation and interest rates. It seems that in 2010-2011 Poland’s public debt will increase considerably. There are two big unknowns in this respect – how the parliament would react to the government debt moving above the threshold of 55% of GDP in 2011, which is quite likely, and how the financial markets would react to a government deficit of around 6-8% of GDP. An unfavourable reaction from the markets would mean a threat of a large increase in the debt service cost. In the extreme case, the increase could be as high as to force considerable cuts in public spending on investment, something which obviously would have an adverse impact on the whole real economy.

The threat of an unfavourable reaction from the markets would increase if the government and parliament decided to redefine official public debt by moving part of Poland’s open debt to hidden debt or to remove the provision on the cautionary threshold of 55% of GDP from the law on public finances and the provision on the 60% threshold from the Polish constitution. Judging by remarks made by some ministers and government advisers, the two moves are being considered. And this is exactly why macroeconomic business risk is still quite high.