Revised Polish GDP data, showing growth at only 0.5 % y/y, dragged down thezloty as well as the Hungarian forint. Although, in comparison to neighbours, the0.5% growth might look good, in the case of Poland growing 0.7% and 1.3 % intwo preceding quarters, markets have been disappointed. The zloty’s reactionwas relatively sharp, the currency weakened by almost 1 % to its 10-month low.
Polish data weighed adversely on the CEE currencies in spite of parallel positivenews arriving from Brussels. The European Commission published its evaluationof country specific fiscal policies yesterday, implying that the EC has somewhatsoftened its stance towards desirable degree of fiscal restrictions. The EC granted6 countries (including Poland) more time to consolidate their public finance andfulfil the Maastricht criterion of public budget deficit below or equal to 3 % of GDP. Polish Prime minister Donald Tusk praised the EC decision andacknowledged breathing space at a time of strained public finance it offered to hiscountry. Although the decision de facto opened door to temporary expansion ofpublic deficit in order to stimulate the economy, blowing up budget deficit toomuch for a long time is not easy in Poland due to the fact that the Constitutionputs a cap on the relative size of the gap.
In addition, the EC also recommended abrogation of Excessive deficit procedurefor 5 countries yesterday, including Hungary. Budapest has been under the EDPsince 2004. Hungarian government welcomes the step as it removes threat offinancial sanctions in the form of reduced European development funds paymentsand hence improves control of fiscal discipline. The ECs decision was widelyexpected, though, and consequently had only marginal market impact unlike the negative news regarding Polish growth.