Poland projection note on OECD Economic Outlook November 2023

124 

Poland Real GDP is expected to grow by 0.4% in 2023 as high inflation and restrictive monetary policy weaken domestic demand. Growth should recover to 2.6% in 2024 and pick up to 2.9% in 2025 as consumption rebounds and is accompanied by robust investment, supported by EU Recovery and Resilience funds.

Headline inflation has halved over 2023 but core inflation is declining more slowly due to a robust labour market. Inflation is projected to reach 3.4% by the end of 2025. Persistent inflation or additional fiscal spending pose upside risks to inflation, while an escalation of the war in Ukraine could lower growth.

Monetary policy should ease only gradually given the risk of inflation persistence and the uncertainty in the outlook. Fiscal consolidation is needed to help reduce inflation and put the public finances on a more prudent path, despite significant spending pressures. In the medium-term, accelerated decarbonisation and digitalisation, supported by policies to improve skills, would raise energy security and lead to greener and stronger economic growth.

The domestic economy has been subdued in 2023 The economy has remained subdued throughout most of 2023. Private consumption growth has been low as the cost of credit remained high. Despite declines in mortgages and housing construction, total investment growth has remained robust. Since the summer, retail sales have continued to increase.

Consumer confidence rose above its long-run average in October. However, the PMI and other business confidence surveys suggest further weakness in manufacturing. The labour market remains resilient, as unemployment held at 2.8% in September, although wage growth has eased. Having peaked in February this year, headline inflation fell to 6.6% in October due to slowing food and energy price growth. Core inflation has declined but remains high at 8.1%.

Poland

Source: OECD Economic Outlook 114 database; and Statistics Poland.

StatLink 2 https://stat.link/mus5jt

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023

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Poland: Demand, output and prices 2020

Poland GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding¹ Total domestic demand Exports of goods and services Imports of goods and services Net exports¹ Memorandum items GDP deflator Consumer price index Core inflation index2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government debt, Maastricht definition³ (% of GDP) Current account balance (% of GDP)

2021

2022

2023

2024

2025

Percentage changes, volume (2015 prices)

Current prices PLN billion

2 335.5 1 321.6 442.5 434.9 2 199.1 2.6 2 201.7 1 239.3 1 105.5 133.8

6.8 6.2 5.0 0.3 4.8 3.1 8.6 12.3 16.1 -1.1

5.6 5.2 0.8 5.6 4.4 1.6 5.9 6.8 6.9 0.2

0.4 -1.4 4.6 6.8 1.3 -4.0 -2.8 -2.0 -5.3 2.0

2.6 2.6 3.3 1.9 2.6 -0.4 2.2 1.1 2.2 -0.5

2.9 3.1 3.9 3.3 3.3 0.0 3.3 3.3 4.1 -0.2

_ _ _ _ _ _ _ _

5.4 5.1 4.1 3.3 2.0 -1.8 53.6 -1.3

10.3 14.4 9.0 2.9 -2.9 -3.7 49.4 -2.4

10.7 11.8 10.1 2.9 1.7 -5.2 51.4 0.3

2.4 4.7 4.9 3.3 2.6 -4.3 54.1 -1.3

3.2 3.7 3.7 3.5 1.1 -4.4 56.4 -1.3

1. Contributions to changes in real GDP, actual amount in the first column.

2. Consumer price index excluding food and energy.

3. The Maastricht definition of general government debt includes only loans, debt securities, and currency and deposits, with debt at face value rather than market value.

Source: OECD Economic Outlook 114 database.

StatLink 2 https://stat.link/ozfaj8

Exports fell in the first half of 2023 as deteriorating growth in the euro area led to weaker demand. But imports declined by more, as commodity prices decreased and as firms continued to draw down their inventories, leading to an improvement in the current account balance. Reductions in inventories and easing supply chain disruptions contributed to a sharp decline in goods inflation. Services inflation, partly supported by elevated wage growth, has declined more gradually. The significant number of Ukrainian refugees in the labour market, however, will continue to moderate wage growth.

Monetary policy has eased while fiscal support continued The National Bank of Poland has started easing monetary policy despite relatively high inflation, reducing interest rates to 5.75% in October, one percentage point below their peak. Fiscal support has continued, with the government’s budget deficit over 5% of GDP this year. Energy price caps, subsidies to energy-intensive companies, and the zero VAT rate on food have been maintained in 2023. Healthcare spending has been gradually increasing. Military expenditure is rising to around 4% of GDP this year, up from 2.2% in 2022. The withdrawal of energy and food support measures in 2024 should lead to fiscal tightening, but the eventual fiscal stance will depend on the newly elected government’s budget plans.

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023

126 

The economy will recover gradually, but inflation will decline slowly The economic recovery will be gradual. Receding inflation and falling uncertainty accompanied by decreasing interest rates should support consumption growth even as the labour market softens.

Investment growth should remain robust, underpinned by improving growth prospects and EU Recovery and Resilience funds. After slowing to 0.4% this year, real GDP growth is projected recover to 2.6% in 2024 and 2.9% in 2025. Public debt should rise to 56.4% of GDP over the next two years. Inflation is expected to be 4.7% over 2024 and reach 3.4% by the end of 2025, just under the upper limit of the central bank’s target band. Still, the outlook remains uncertain. Persistent inflation or additional fiscal spending could pose upside risks to inflation, warranting tighter monetary policy. An escalation of the war in Ukraine could increase uncertainty and lower growth.

Fiscal consolidation is needed alongside reforms to boost growth Given a relatively tight labour market and the risk of persistent inflation, the pace of monetary policy easing should be gradual until inflation durably returns to target. Fiscal consolidation is needed from 2024 onwards to help reduce inflation and put the public finances on a more sustainable path. The new government should develop a credible medium-term fiscal strategy and establish an independent fiscal council. This should address rising healthcare and pension costs due to population ageing, which could amount to 3% of GDP by 2040. Further diversification of energy imports and increased investment in renewables would improve energy security and contribute to greener growth. Skills shortages need to be addressed to reap the full benefits of the digital and green transitions. Managerial skills, key to advancing digitalisation, should be boosted through flexible and modular training. Older adults, the unemployed and the low-skilled require upgrading of weak basic and digital skills and access to lifelong training. Integration of refugees, mostly comprising women with children, should continue through childcare, schooling and language training.

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023