Jan Cienski in Warsaw -

Poland's economy, like several others in the region, is picking up speed at such a pace that worries are growing about the economy overheating.

The finance ministry is being forced to frequently restate its growth estimates – the latest coming from Katarzyna Zajdel-Kurowska, the deputy finance minister, who says the economy will expand at a pace of above 6% in 2007. She says that growth in the first quarter of this year will come in at about 7%.

"The risk that economic growth will come in as low as 5% is very low," she says.

Her comments mark at least the third growth upgrade from the finance ministry. In this year's budget, the ministry predicted growth of 4.6%, which was later raised to 5.1%. Zyta Gilowska, the finance minister, then said growth could reach 6%.

The good numbers are causing joy in the government, but more and more economists and financial policymakers think Poland is growing at far above its sustainable rate.

"The consequence of very rapid growth in the short term is instability, which may call for a reaction by monetary authorities," says Zajdel-Kurowska.

Piotr Kalisz, chief economist for Citibank Handlowy, says that Poland can grow sustainably at only about 4.5% a year. "We are approaching the moment when inflation starts to react to domestic demand," he says.

Indeed, there are growing signs that the Polish economy is beginning to show signs of strain.

Going west

The most obvious symptom is increasing tightness in the labour market. The first industry to have experienced a labour shortage is construction. Larger cities like Warsaw and Krakow have been experiencing a building boom as investors put up both commercial and residential buildings. However, many of the workers needed to complete the projects have migrated to Western Europe, where their skills are also in demand but the salaries are four or five times higher.

The economy is already starting to respond. Average wages rose 8% in December and 7.7% in January.

"The era of growth without wage inflation is ending," says Citibank's Kalisz.

Inflation is also inching up, rising to 1.9% in February from 1.7% in January and the central bank predicts it could rise to 3.5% by the end of next year.

Poland's central bank is beginning to react. Although the interest rate-setting Monetary Policy Council is keeping the headline rate at 4%, the bank's post-meeting communiqué noted this week that keeping inflation close to the target rate of 2.5% "may necessitate tightening monetary policy in the nearest time."

Many economists now expect the bank to raise rates by about 25 basis points within the next month or two. Rates have not changed in 13 months.

There is little doubt that the key to reining in inflation and reducing wage pressure is to push through economic reforms that have been stymied for years by a lack of political will. Even Jaroslaw Kaczynski, Poland's business-leery prime minister, has been making friendly noises toward entrepreneurs, and Finance Minister Gilowska is expected to present a fiscal reform package next week.

Reforms would have to slash the bureaucracy that makes it hard to start and expand a business, as well as reducing the employer-borne social security payments that add more than 50% to salary costs.

"It is a myth that labour costs in Poland are low," says Zajdel-Kurowska. "When we compare employer costs, Poland is one of the more expensive countries in Europe."

She rails against the "pathologies" in badly targeted social security and disability payments that reduce the incentive to work.

Despite the wage pressure and the difficulties many businesses face in finding workers, Poland has a 14.9% unemployment rate, the highest in the EU.

Labour tightness would appear to be surprising, but Poland's unemployment statistics have long been suspect. For one thing more than a million Poles have migrated to Western Europe since 2004, and many of them are still listed on the unemployment rolls. Furthermore, many of the long-term unemployed are people like former miners and collective farm workers who are older and have few marketable skills.

Poland also has one of the lowest labour participation rates in Europe, as many workers find it more profitable to take unemployment or disability payments instead of working.

However, the reforms that are likely to be proposed by the finance minister, together with some attempts at reducing red tape likely for later this year, are unlikely to structurally change Poland's economy.

"If we reformed, then we could raise our growth potential," says Kalisz. "But from what I've seen of the current reform ideas, they won't do the trick."

Send comments to The Editor