| After a 3.4% year-on-year increase in Q1 of 2012, GDP growth slowed to 2.3% in Q2 and 1.4% in Q3. This trend is due partly to lower export demand from the Eurozone, but mainly to a weaker domestic economy: with lower investments and consumer spending following the governments imposition of austerity measures. Domestic demand decreased 0.7% in Q3 of 2012 after a 0.4% drop in Q2. These downward trends are expected to continue into 2013, but will be offset somewhat by an increase in government spending. Inflation has been above the Eurozone average since the start of the financial crisis in 2008, but is now on a downward path and nearing the Eurozone average: after 3.7% in 2012 it is expected to decrease to 2.9% in 2013. Unemployment has remained stable throughout 2012, at 9.8%, despite the moderating economic growth. The jobless rate is up from its 2008 low of 7.1%, but is still below the Eurozone level. A further increase to 10.6% in 2013 is expected as economic performance dips. Interest rate cuts to support growth During the 2008/2009 credit crisis the Polish currency depreciated sharply against the EUR. However, since then, the exchange rate has been relatively stable, with the EUR per zloty exchange rate fluctuating between 0.26 and 0.22. There is currently no reason to expect any major currency fluctuation. Because of the current economic slowdown and lower inflation, the Polish central bank has cut its policy interest rate twice: in November and December 2012. It now stands at 4.25%, compared to 4.75% in September, and further cuts may be made if the economy remains weak. Public finances are stable Overall, the governments financial position is stable and relatively comfortable. The budget deficit improved significantly in 2011: to 1.6% of GDP. While last October it was expected to decrease further in 2012, to 1% of GDP, this forecast has since been revised downwards, to around 2% of GDP, as the government eases its deficit targets to maintain growth. Compared to other countries in the region, Polands fiscal deficit is still satisfactory. However, public debt was already relatively high in 2007 [43% of GDP] and increased to 53% in 2011. The current account deficit is expected to be around 5.5% of GDP in 2012: a small increase on 2011. The latest figures show that exports increased 3% year-on-year in the first half of 2012, while imports barely changed, leading to an improvement in the trade deficit. Export growth was due mainly to increased demand from Russia, Ukraine and other emerging markets. The current account deficit is financed largely by portfolio investment in government bonds and only in small part by foreign direct investment [FDI]. As a result, Poland is dependent on foreign financing and remains vulnerable to changes in the sentiment of international financial markets. Bond yields are quite low Thanks to the satisfactory growth rates and relatively good public finances, the government can borrow at reasonably good rates on the financial markets. Indeed, the interest rates on 10-year government bonds have decreased over the past two years, following the pattern of safe-haven Germany. While this position could fall victim to the current volatile sentiment of international investors, Polands prudent fiscal policy and robust economic growth should enable the government to continue to borrow at low rates in the medium-term future. | 
