Weak growth in 2023
2023 will see the Polish economy record one of its lowest growth rates since its economic transformation in late 1980s. Inflation, which soared in 2022 and hit a high 17.2% in January 2023, has affected real household disposable income and the economy as a consequence. Private consumption (58% of GDP) remains a crucial part of the economy. Inflation is expected peak in the first quarter of 2023 and gradually decrease thereafter, albeit still sitting well above the central bank’s inflation target of 2.5% ±1 p.p. tolerance band. The monetary tightening cycle that started in October 2021 and which so far has delivered eleven interest rate hikes totalling 665 basis point – with the latest occurring in September 2022 – may well not be over. Core inflation developments could spark further monetary tightening if tensions are caused by a stronger labour market that prompts a revival in household consumption. The labour market remains in a good shape with low unemployment (2.9% in December 2022 according to Eurostat methodology and one of the lowest levels in the EU, next to Czechia and Germany) and solid nominal wage growth (+10.3% in December 2022). However, wages have been suffering in real terms as they turned negative and are expected to stay in negative territory as long as double-digit inflation exists and companies are reluctant to increase their headcounts amid the ongoing uncertainty.
At the same time, investments will not come to the rescue as their growth will be restricted not only by economic factors but also by delays in obtaining EU Recovery and Resilience Funds (RRF) due to the ongoing rule of law dispute with the EU. The size of RRF grants and loans is a relatively modest EUR35 billion (5.6% of GDP); however, those funds’ indirectly impact other parts of economy and sectors, along with affected overall investments. Confidence could bear the brunt of missed investments.
The risk of energy disruptions is low thanks to the diversification from Russian gas and coal supplies. However, this does not mean that Poland will escape the risk of high energy prices in the future. If the risk materialises, the competitiveness of energy-inefficient industries and supply chains will erode. On the other hand, Poland still benefits from the inflow of foreign direct investments which could be further enhanced by nearshoring trends.
Growing budget deficit
In 2023, the general government deficit-to-GDP ratio is expected to increase further due to lower revenues and growing expenditure to tackle both the energy crisis and geopolitical issues, added to higher defence spending which is planned at close to 4% of GDP. Despite the reduction of the so-called anti-inflationary shield (reduction in value-added, excise and fuel taxes, among other measures, implemented at the beginning of 2022), the current cap on electricity and gas prices is expected to cost the budget dearly. Furthermore, the parliamentary elections scheduled for the autumn could further encourage fiscal easing.
Easing supply chains disruptions have buoyed export growth and foreign trade as a result. As weaker domestic demand limits imports growth, net exports are expected to contribute positively to GDP growth in 2023. Their contribution already turned positive in the second half of 2022 after trending in negative terrain during the previous four quarters. However, the economic performance of the main external partners will be crucial (i.e., other EU countries which constitute a 76% share of exports). The current account deficit should ease slightly. Increasing foreign direct investment and steady EU capital inflows (cohesion funds) will finance it.
Upcoming parliamentary elections
The ruling right-wing Law and Justice party (PiS) won a second term in office at the last parliamentary elections held in October 2019. The latest polls still show large support for the governing party, albeit lower than at the 2019 elections. The next elections due in 2023 may see a more divided political scene.
Externally, conflict with the European Commission over erosion of the rule of law is making the disbursement of EU recovery funds uncertain. The delay in approving key judicial reform is jeopardising the release of the first tranche of RRF funds. The European Commission introduced the Conditionality Mechanism back in 2020 which could withhold budget disbursements to Poland and Hungary. A bill to overhaul Poland’s disciplinary system for judges was passed by Parliament in February 2023. However, the move has not unlocked the stalemate as President Andrzej Duda decided to send the bill to the Constitutional Tribunal, the court that decides whether laws comply with the Polish constitution.