Return to growth
After minor growth last year, the Polish economy is expected to expand in 2024. Household consumption will resume as the growth driver after easing on back of the high inflation recorded in 2022 and 2023. The inflation rate exceeded 18% year-over-year in February 2023 and since then has been on a downtrend, reaching 6.2% in December 2023. Furthermore, the disinflation process will continue in the first half of 2024 before reversing, once measures (a cap on electricity prices, reduced value-added tax rate on certain food products) to limit consumer price increases are lifted, which is expected to take place in mid-2024. That said, the tight labour market – the unemployment rate stood at 2.7% according to Eurostat in December 2023 – plus solid wage growth and improved consumer confidence will boost consumer spending.
The Polish central bank already started to lower interest rates in September 2023, which resulted in two rate cuts in the benchmark rate by 100 basis points in total to 5.75%. However, further monetary easing is questionable given the expected improvement in economic activity as well as the rebound of inflation in the second half of year, as mentioned above. At the same time, core inflation remained above the headline level during last months of 2023 and stood at 6.9% in December.
While household consumption will offer the largest contribution to growth, investments should also support economic activity to some extent. Poland should benefit from the unblocking of EU funds, including those of the Recovery and Resilience Facility. Once the economy shows clear signs of improvement, companies will be more willing to invest in domestic fixed assets, while foreign direct investments (FDI) will increase as Poland is attractive in terms of quality and labour costs, and its geographical proximity to Western Europe. The recent change of government could also further encourage foreign investments. Net exports will contribute positively to growth thanks to increased exports especially if the economic activity improves in Western Europe, which is Poland’s main foreign trade destination. Nevertheless, it will not become a growth driver as higher imports will be recorded on back of more robust household consumption and higher component imports.
Fiscal balance under pressure
Poland will again record a wide budget deficit in 2024. Whereas the expected economic rebound could bring higher revenues, retaining the above-mentioned measures (capped energy prices and reduced value-added tax) will weigh on the budget. Furthermore, the new government formed after the October 2023 elections is likely to fulfil its electoral promises of keeping the previous social measures and increasing pay for teachers and public administration employees. At the same time, Poland will continue spending on defence (3.9% of GDP in 2023).
The current account balance will record a deficit, after two years of surplus. Poland’s goods exports have been suffering from sluggish economic activity in Western Europe and especially in Germany, which remains its main export destination. Subdued global trade also impacts Poland as the country is integrated in various supply chains. However, the country could benefit from nearshoring decisions of European companies, while exports should improve in the second half of this year.
The new government clashes with the President
The latest parliamentary elections held in October 2023 once again gave the largest number of votes to the Law and Justice party (right-wing conservative, PiS). President Duda reappointed Mateusz Morawiecki from that party as candidate for Prime Minister (PM) as he won the most votes. However, he did not survive the vote of confidence in Sejm as the opposition coalition comprising Civic Coalition of (KO, liberals), Third Way (centre-right) and Left (left-wing) have 248 seats in the 460-member Lower House of Parliament. Donald Tusk, the already twice-serving Prime Minister, ex-President of European Council (2014-2019), and leader of KO was appointed PM. His government is seen as EU-oriented and willing to improve relations with the European Commission, which immediately translated into better market sentiment for Polish currency and bonds after elections results. The EU already approved over EUR 5 billion in grants and loans to Poland in December 2023. Furthermore, in February 2024, the European Commission announced it would unlock funds (Cohesion as well as the Recovery and Resilience Facility) that were frozen due to the previous government’s conflict with the European Commission over the erosion of the rule of law. Disbursements include the access to EUR 135 billion which could be used over the next years, with only partial usage in the course of 2024. So far, the government is progressively fulfilling its reform agenda due to clashes with President Andrzej Duda, who is nominally unaffiliated, but originates from PiS. The President holds a power of veto and defers legal acts to the Constitutional Council with some judges having been appointed by PiS, which is hampering the new government's policy effectiveness, especially since the coalition lacks the required number of votes to sidestep it. These quarrels could last till the next Presidential election in mid-2025 when a liberal candidate could well make it to the presidency. Before that, local and EU elections are scheduled in April and June 2024, respectively.