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Polish economy grew 5.8% in 2006, fastest in 9 years - extended

Poland's economy expanded in 2006 at the fastest annual pace in nine years as buoyant exports encouraged companies to step up hiring and raise wages while record-low borrowing costs boosted investments.

GDP grew 5.8% last year, compared with 3.5% in the previous year, the statistics office said in a preliminary report. The office will report Q4 growth at the end of March. Membership of the European Union in 2004 triggered foreign demand for Polish products, leading companies to increase their workforces and raise salaries. Still, unemployment remained high, holding consumer prices in check and persuading the central bank to avoid raising interest rates, enabling companies to invest. „Investments were the core ingredient of this acceleration, while private consumption rose steadily, making economic growth strong and balanced, said Agnieszka Decewicz, an economist at Bank Pekao SA in Warsaw. The expansion „poses no threat to inflation and should not be a matter of concern for the central bank.”

The zloty fell to 3.935 against the euro from Friday's 3.9215 at 2:45 p.m. in Warsaw. The government five-year bond prices fell to 97.35, pushing the yields up by 4 basis points to 4.942%. The result exceeded the 5.6% median estimate of 15 economists surveyed by Bloomberg. „The better than expected GDP growth shouldn't be negative news for the bond market as it comes entirely from faster investments and probably denotes prolonging the non-inflationary period of high domestic demand expansion,” said Mateusz Szczurek, chief economist at ING Bank Slaski in Warsaw. Exports rose an annual 23% in the first 11 months of last year, with two-thirds of goods sold within the EU. Exports were 50% higher than in the comparable period in 2003, before Poland joined the 27-nation bloc. „Exports don't weigh much in the statistical composition of GDP but they still have a crucial meaning as a source of demand that creates market sentiment and makes our companies boost sales abroad,” said Michal Dybula, chief economist at BNP Paribas in Warsaw.

Still, Szczurek of ING expects exports to fall this year „due to slower world growth and further strength in domestic demand.” According to his estimates, exports rose 15.9% in 2006. Grupa Kety SA, which exports a third of its food packaging and building materials abroad, in October raised its 2006 profit forecast by 10% and expects record net income this year. The company decided last year to borrow at least 200 million zloty ($66 million) for acquisitions in Poland and Germany and to build a new plant in Ukraine. „The range of products we are offering perfectly reflects consumer sentiment and the condition of the economy so we need to raise our efforts to meet the demand,” said Michal Malina, head of investor relations and former CFO at Kety before the GDP report. „The current level of interest rates encourages us to finance the expansion from loans. It's a very profitable investment.”

Investments rose 16.7% last year, according to preliminary estimates by the statistics office, compared with 6.5% in 2005. „Low borrowing costs have had a fundamental impact on both corporate and private investments, especially in the construction market,” BNP's Dybula said. Industrial output rose 11.8% in 2006, driven by construction sales that gained 17.5% last year. The central bank has kept the benchmark seven-day reference rate at a record-low 4% since March 2006 as annual inflation remained below its 2.5% target for the past 19 months. „On the demand side, the growth in 2006 was led by investments and on the supply side - by construction,” said Monika Kurtek, an economist at Bank BPH in Warsaw, who estimates the Q4 GDP was the highest last year and probably totaled 6.6%. „It's one a more argument for doves in the Monetary Policy Council and it is more and more probable that interest rates will remain flat this year.” Cheap loans and higher wages encouraged Poles to buy new flats. Polish banks probably awarded a record 41 billion zloty (€10.45 billion) of home loans last year, up 70% from a year earlier, estimated Krzysztof Pietraszkiewicz, head of the Polish Banking Association. Dom Development SA, a real-estate developer, sold 15% more apartments in Warsaw last year than in 2005, boosting sales in the first nine months by 55%.

„Rising jobs and wages increased household budgets and low consumer prices also drove up disposable income,” said Grzegorz Maliszewski, an economist at Warsaw-based Bank Millennium SA. „On the top of that, there have been easily accessible banking loans that drove economic growth.” Retail sales growth tripled last year from 2005, led by cars and household appliances. The individual consumption gained 5.2% last year, compared with a 1.9% increase in 2005, while the domestic demand was 5.8%, compared with a 2.4% growth in 2005. „This was the first in many years that domestic impetus was behind the strong economic growth because consumer demand impacted the GDP to a large extent,” said Jozef Olenski, head of the statistics office, at a press conference in Warsaw. (Bloomberg)