Polish economy slows sharply, yields to euro zone gloom

WARSAW (Reuters) - Poland's economy slowed sharply in the second quarter, hit by the euro zone's slide toward recession and domestic cuts in public spending that have taken the steam out of one of European Union's few remaining growth stories.

Growth eased to 2.4 percent year-on-year in the second quarter, the lowest since the third quarter of 2009 and half a percentage point below forecast, and with no respite in prospect analysts see a strengthening case for a cut in interest rates.

Private consumption that accounts for 60 percent of the economy and has helped to sustain growth in the country of 38 million people, slowed to a meagre 1.5 percent annually, its lowest level since the second quarter of 2009.

"This (growth data) is bitterly disappointing," said Piotr Bujak, chief economist at Nordea bank in Warsaw.

Up to now, the Poles have been insulated from the euro zone slowdown by a massive programme of public investments, including new roads and stadia for the Euro 2012 soccer tournament, which their country co-hosted with neighbouring Ukraine in June.

Public investment is expected to fall in coming years as the government pledged to cut the deficit below the EU's 3 percent of GDP ceiling, prompting harsh economic constraints like those Poland's European peers have been experiencing for four years.

A quickly deteriorating economy may force Poland to go back on a promise two years ago to reduce value-added tax from 2014, Finance Minister Jacek Rostowski said on Thursday, adding there were no risks for the government's 2.5 percent 2012 GDP growth target.

MIRACLE FADES

Poland's economy expanded by a combined 16 percent in 2008-2011, while much of the EU shrank, but a series of gloomy economic indicators show that the economic miracle, as some people called it, is coming to an end.

Earlier this month data showed corporate sector wages rose at the slowest pace in two years in July as firms stopped hiring new workers, adding to the case for the central bank to cut rates soon.

There is also little hope of foreign trade driving growth as nearly 80 percent of Poland's exports go to other parts of the EU, where the economic downturn and a debt crisis have crippled demand for goods.

Company results published earlier in August added to the gloomy outlook with one of Poland's top broadcasters TVN TVNN.WA saying the advertising market will shrink by as much as 9 percent this year, following a 7.5 percent drop in the first half.

Also the construction sector is in trouble, after largest listed builder PBG PBGG.WA was granted bankruptcy protection in June, triggering a wave of bankruptcies amid smaller companies as new supply contracts dwindled.

The weakening economy is supporting the case for a cut in official interest rates this year, analysts say. Central bank Governor Marek Belka earlier this week had turned around expectations that the bank could wait until 2013 before moving.

"Because of this (data) we can now expect rate cuts," Ernest Pytlarczyk, chief economist at BRE Bank, said on Thursday. "We expect the first move in October."

The central bank's policy council next meets to decide on interest rates on September 4-5, and Prime Minister Donald Tusk is expected to present a plan for fighting the economic downturn later in September.

Thursday's GDP release sent the zloty down by 0.7 percent against the euro and strengthened bonds on the shorter-end of the yield curve.

(Reporting by Filip Kochan, writing by Karolina Slowikowska and Marcin Goettig; editing by Stephen Nisbet)