Output growth has averaged just over 1 per cent during the last two years, with the unemployment rate rising to over 20 per cent. Helped by the strong export competitiveness, gradually increasing business profits and growing confidence as Poland moves closer to European Union membership, growth is likely to strengthen, reaching 3½ per cent in 2004. Headline inflation is also expected to pick up somewhat in the short-term, reflecting the effective depreciation of the currency.

Substantial cuts in nominal interest rates and a depreciation of the zloty have eased monetary conditions. Further monetary easing is desirable given the slow pace of the recovery relative to potential and still high real interest rates. But this needs to be supported by a strong effort to bring government spending under control. To maintain a favourable business climate and the attractiveness of Poland to foreign investors, structural reforms in labour and product market should be pursued in earnest.