Last update (15/05/2023)
Despite significant headwinds, the Polish economy continued on a strong growth path in 2022, supported by an expansionary fiscal stance, a favourable situation in the labour market and the large inflow of displaced persons from Ukraine. Data on the real economy suggests that economic growth in the fourth quarter weakened visibly, partly due to elevated inflation and tighter financing conditions. Nevertheless, a strong revision of historical data led to a significantly higher starting GDP level for 2022, lifting the real GDP growth projection in 2022 to 4.9% - i.e. 0.9 pps. higher than in the Autumn Forecast.
|GDP growth (%, yoy)||5,1||0,7||2,7|
|Inflation (%, yoy)||13,2||11,7||6,0|
|General government balance (% of GDP)||-3,7||-5,0||-3,7|
|Gross public debt (% of GDP)||49,1||50,5||53,0|
|Current account balance (% of GDP)||-3,2||-1,0||0,5|
Growth to decelerate after strong 2022
The Polish economy showed upbeat economic growth in 2022, primarily driven by a surge in private consumption and inventories. However, elevated inflation, tightened financing conditions, and low consumer and business confidence negatively impacted economic activity towards the end of the year, resulting in a substantial quarter-on-quarter GDP decline of 2.4% in 2022-Q4.
These downside factors are set to continue weighing on GDP growth over the forecast horizon. Private consumption is expected to decrease moderately in 2023, as the boost provided by the inflow of people fleeing Ukraine gradually fades and elevated inflation negatively affects real incomes. The continued rise in interest rates is also set to dampen private consumption, given the large share of mortgages with variable interest rates.
Low confidence, elevated cost pressures and increasing financing costs will likely deteriorate the outlook for private investment. Nevertheless, this is set to be counterbalanced by a rise in public defence spending and local government investments. Soaring prices and supply-chain disruptions throughout 2021 and 2022 led to an unprecedented accumulation of inventories, which is expected to reverse in 2023-24 and put significant downward pressure on growth.
The easing of supply bottlenecks and a marked inflow of foreign direct investment are set to support export growth, while imports are projected to be negatively impacted by the deceleration of domestic demand and the reversal of the inventory cycle. As a result, the trade balance is expected to post a strong positive contribution to GDP growth, especially in 2023.
Overall, real GDP growth is forecast to slow to 0.7% in 2023, before rebounding to 2.7% in 2024 as inflationary pressures gradually subside and financing conditions improve. This forecast is however subject to high uncertainty with 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 for economic growth.
The unemployment rate to remain stable
Despite the deceleration in economic activity, the unemployment rate is set to remain stable over the forecast horizon given that acute labour shortages are making firms reluctant to lay-off workers. Consequently, the unemployment rate is projected to increase only marginally to 3.3% in 2023, before gradually declining again to 3.2% in 2024. Wages are expected to continue growing at a fast pace, fuelled by the minimum wage increase and low unemployment rate, resulting in positive real wage growth in both 2023 and 2024.
Inflation to remain elevated after peaking in early-2023
After consistently surprising on the upside throughout 2022, HICP inflation seems to have reached its peak, falling from 17.2% in February 2023 to 15.2% in March. Energy price inflation is set to continue its downward path during 2023, supported by strong base effects and declining commodity prices. Weakening domestic demand and high interest rates are also expected to exert downward pressure on inflation, particularly on the core inflation component. Nevertheless, inflation is projected to remain well above the central bank target given robust wage growth and the lagged pass-through of elevated energy prices into core inflation components. As a result, after reaching 11.7% in 2023, HICP inflation is forecast to decelerate – but remain high – at 6.0% in 2024.
Public finances still unbalanced
In 2022, the general government deficit amounted to 3.7% of GDP. The cost of measures related to the energy crisis and of aid to displaced persons from Ukraine combined with the adverse impact of the personal income tax reform put pressure on public finances. The fiscal balance was supported by soaring revenue from corporate income taxes owed to the high profits of companies.
The general government deficit is expected to increase to 5.0% of GDP in 2023. The net budgetary cost of the energy support measures is projected in the Commission 2023 spring forecast at 1.7% of GDP in 2023, compared with 1.9% in 2022. The measures include price freeze schemes for electricity and gas, which are partly funded by mechanisms based on windfall profits of energy producers. In addition, the high indexation of pensions is set to increase social benefits while public sector wages and the value of government purchases are expected to grow on the back of high inflation. The government has also decided to raise spending on healthcare and on defence. The extraordinary aid granted to farmers is set to further increase the deficit in 2023. Deficit developments in 2023 are also affected by the assumed complete phasing out of COVID-19 emergency temporary measures, which are estimated to have amounted to 0.7% of GDP in 2022.
In 2024, the general government deficit is forecast to remain above the 3% of GDP reference value at 3.7% of GDP. The Commission currently assumes the net cost of energy support measures at 0.3% of GDP in 2024. Other government expenditure, including public investment, is expected to remain high. Adjustments related to timing of payment and deliveries of military investments are set to increase the public debt ratio, which is projected to reach 53% of GDP by 2024.