The Polish economy weathered the COVID-19 pandemic with a mild GDP contraction, followed by a strong recovery. However, signs of fluctuations in 2022 have introduced uncertainty. With a negative carry-over effect to 2023, the growth of Polish economy has slowed down, yet it remains resilient.

Performance of the Polish economy

Among Central European countries, Poland posted the best economic performance in 2022, despite several successive shocks. The economy grew 5.2% year-on-year, after reaching 6.7% in 2021. Despite this, Q4 witnessed a notable downturn with a 2.4% quarter-on-quarter contraction, primarily due to destocking and reduced household consumption. Rising inflation has impacted household purchasing power throughout 2022 and is unlikely to improve in the short term.

Signs of weakness in the labour market, reflected in a slight rise in unemployment to 5.5% in February 2023, indicate lingering challenges. Despite a notable 3.2% increase in the minimum wage in July, bringing it to 3,600 zlotys (855.93 USD) per month, the growth in company wages (a year-on-year increase of +13.6% in February) is trailing behind inflation.

Despite the ups and downs in household purchasing power and labour market performance, the positive contributions from investment and net exports stand out. All in all, Cynthia Kalasopatan, the market economist at Mizuho Bank, suggests that the Polish economy is likely to escape a recession thanks to continuous fiscal support. Looking ahead, the nation’s economy should improve from 2024 onwards as inflation falls and the global economy recovers.

Inflationary pressures and monetary policy

Poland’s inflation rate has been on the rise, reaching 18.4% year-on-year in February 2023. This rise in prices is primarily the consequence of the VAT rate on energy, reverting to 23% in January 2023 from a temporary reduction to 8% last year. By way of compensation, the government has frozen gas and electricity prices at 2022 levels for households and public services. Although the ease of global agricultural and energy prices is likely to cause a further drop in inflation, double-digit inflation is still anticipated to persist throughout the year. Global droughts are mainly the cause of tensions on agricultural commodity prices.

Monetary policy, initially restrictive with a key rate increase of 450 basis points in 2022, has become less so. The Central Bank has maintained a monetary status quo, hinting at concerns about economic growth and indicating the end of the tightening cycle.

European funds and foreign direct investment (FDI)

While European funds remain temporarily blocked due to insufficient progress in judicial reforms, the Polish economy should continue to show resilience given solid macroeconomic fundamentals and structural assets. The country has witnessed an influx of FDI. Prticularly in response to supply shocks and protectionist measures implemented by the United States against China. This influx of FDI has played a significant role in covering the current account deficit.

Despite the temporary absence of European funds, Poland’s robust macroeconomic fundamentals and structural assets position it as an attractive destination for investment. Over the next two years, a reduction in the energy and food bill is expected to result in an improvement in the current account. Similarly, the rebound in the global economy over this period should also contribute to the improvement in the current account.

Fiscal policies and public finances

In terms of public finances, there was a temporary pause in fiscal consolidation in order to address the economic shocks since 2020. The 2022 budget deficit, estimated at 3% of GDP, performed better than expected, driven in part by the good performance of tax revenues.

In 2023, however, the budget deficit will rise to around 4.5% of GDP by prediction. This increase is due to the extension of support measures for households, including energy subsidies and price freezes on certain foods. A strong increase in military spending is also expected to be in the region of 4% of GDP in 2023, compared to 2.4% in 2022. The electoral context, generally accompanied by generous measures, should have a significant impact on public accounts as well.

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