Following strong GDP growth in 2022, economic activity in Poland is set to weaken due to increased uncertainty, a tightening of financing conditions, and the economy’s adjustment to higher commodity prices. Inflation is expected to remain elevated as rising production costs are passed down to consumers. The general government deficit is forecast to widen under the pressure of expenditures related to national defence and the energy crisis.
Last update (forecast)
Last update (11/11/2022)
|GDP growth (%, yoy)||6,8||4,0||0,7||2,6|
|Inflation (%, yoy)||5,2||13,3||13,8||4,9|
|General government balance (% of GDP)||-1,8||-4,8||-5,5||-5,2|
|Gross public debt (% of GDP)||53,8||51,3||52,9||54,2|
|Current account balance (% of GDP)||-0,1||-2,9||-2,5||-1,6|
Growth to remain strong in 2022…
The Polish economy continued its upward trajectory in the first half of 2022, although a marked drop in inventories and investment led to a contraction in real GDP in the second quarter. Data on the real economy suggest that growth was at full steam in the third quarter, with industrial output and retail sales expanding at a solid pace. As a result, despite a deterioration in confidence indicators, the second half of the year is expected to see a relatively good performance, leaving annual real GDP growth in 2022 at a projected 4.0%.
… before decelerating in 2023 and 2024
Economic growth is set to decelerate visibly in 2023 and 2024 and become negative at the beginning of 2023. A reversal in the inventory cycle following a period of strong restocking will likely be the main drag on growth over the next quarters, subtracting almost 2 pps from GDP growth in 2023. Low confidence, elevated cost pressures and increasing financing costs are expected to weigh on private investment growth, especially in construction. Still, a rise in public defence spending and local government investments is set to more than outweigh the drop in private investment, leaving total investment growth in 2023 well into positive territory. Despite elevated inflation, private consumption growth is expected to remain upbeat thanks to significant policy support, low unemployment, and the inflow of displaced persons from Ukraine.
Regarding foreign trade, the assumed easing of supply bottlenecks should support export growth over the forecast horizon. Coupled with low import growth due to the reversal in the inventory cycle, the trade balance is projected to contribute positively to growth in 2023 and 2024. All in all, real GDP is forecast to slow to 0.7% in 2023 and increase to 2.6% in 2024.
Wages to react to weakening growth
Acute labour shortages will likely mean that the adjustment in the labour market to weakening economic activity will come from a deceleration in wage growth rather than an increase in the unemployment rate, as firms are reluctant to lay off workers. Consequently, the unemployment rate is forecast to increase only slightly to 3.1% in 2024. In turn, high inflation allows companies to adapt to rising energy prices by decreasing real wages, which are expected to decline in 2022 and 2023.
Inflation to peak at the beginning of 2023
HICP inflation has continued to surprise on the upside in recent months due to increased prices of commodities, rising production costs and relatively high demand, which allowed businesses to pass costs down to consumers. Going forward, despite the electricity price freeze introduced by the government, energy price inflation is expected to remain elevated mainly due to a hike in natural gas prices, especially at the beginning of 2023. Under the no-policy change assumption, certain price support measures, in particular reductions of VAT rates, are expected to be phased out in January 2023, putting upward pressure on energy prices, too. Strong wage growth, the pass-through of elevated energy prices, and significant policy support are set to continue fuelling core inflation over the next quarters. Nevertheless, as economic activity weakens and high interest rates suppress demand, inflationary pressures are forecast to gradually subside towards the end of the forecast horizon. As a result, after peaking in the beginning of 2023 at almost 19%, inflation is projected to decelerate to 4.3% towards the end of 2024.
This forecast is subject to significant risks mainly tilted to the downside. A more persistent increase in inflation, especially given Poland’s tight labour market, could put significant pressure on real incomes. A tightening of financing conditions might constrain fiscal policy, with repercussions to economic growth.
Public finances under pressure
The accumulation of expenditure that had not been included in the original budget combined with the income tax cuts will likely lead to an increase in the general government deficit in 2022, estimated at 4.8% of GDP. The government has taken a series of measures to mitigate the impact of high energy prices, including lowering of VAT rates, cash heating subsidies to households and a multi-annual support scheme for energy-intensive industries, with the total estimated budgetary impact of 2.1% of GDP. Simultaneously, public finances are impacted by the cost of aid to people fleeing Ukraine, which covers social benefits, accommodation subsidies as well as expenditures on education and healthcare.
The general government deficit is expected to increase to 5.5% of GDP in 2023. The government has adopted further support measures to alleviate the impact of high energy prices next year. Electricity prices will be frozen for households within certain consumption limits and capped for households and small and medium enterprises. A fixed-price scheme for coal purchase will be introduced. The expenditures on people fleeing Ukraine are set to continue. The government has also launched a large multi-annual programme of investment in defence, increasing spending in this area up to 3% of GDP per year.
The general government deficit is forecast at 5.2% of GDP in 2024. Most of the extraordinary fiscal measures are set to be terminated, while a gradual normalisation of inflation trends is assumed. The public debt ratio, whose increase is moderated by the high nominal growth, is expected to reach 54.2% of GDP.