CPI peaked in 1Q23, but below 20% YoY, and started trending downwards as the direct impact of the energy shock started to abate, leading to annual declines in gasoline and diesel prices as well as slower growth of energy for households. Upward pressure on food prices has also started moderating.
Even core inflation peaked but declines are slower and core prices remain sticky. The legacy of the energy shock is still visible as businesses adjust their prices to cost levels. On top of that, the labour market remains tight and wages are expanding at double-digit pace.
Core inflation is projected to moderate more slowly than headline inflation. The NBP target of 2.5% is unlikely to be reached before late-2025. In our view, the CPI picture doesn’t justify a rate cut this year, but the NBP may refer to the strong PLN and the NBH and provide a single cut in 2H23.
In 2022, the general government deficit reached 3.7% of GDP but was below expectations. In 2023, we expect it to reach 5.2% of GDP. Authorities continue to bear the substantial cost of energy measures and are pursuing ambitious military and healthcare spending programmes.
So far, pre-election pledges of the ruling party have reached 0.6% of GDP one-offs in 2023 and permanent from 2024 onwards at 0.7% of GDP, but more programmes are coming and the opposition also seems to be competing with the incumbents on that front.
With public debt below 50% of GDP there are no immediate threats to fiscal sustainability, but the high structural deficit and high borrowing needs in the mid term are a challenge. Spending on energy transition, defence, healthcare and the risk to the RRF and EU funds call for careful choice of priorities
Poland’s labour force is driven by a combination of structural and cyclical factors, with the former dominating the overall picture so far.
The continuous decline in working age population (some c.2m fewer over the past 12 years) has curbed labour supply although both an increase in participation rate and working immigrants (including the influx of refugees from Ukraine) has eased the pressure. With labour shortages in many sectors of the economy the cyclical employment adjustment is shallow and firms are hoarding labour. The unemployment rate in Poland will remain one of the lowest in the European Union.
High inflation, scarcity of skilled workers and the high administrative increase in the minimum wage has put upward pressure on salaries. Nominal wages are projected to continue increasing at a double-digit pace in the coming quarters.
Poland’s current account deficit widened to 3.0% of GDP in 2022 from 1.3% in 2021 on the back of record-high energy prices in Europe, in particular natural gas and coal prices. Their deliveries from Russia were terminated in early spring 2022.
By contrast, radical decreases in energy commodity prices in 2023 together with a deceleration of domestic demand led to a swift improvement in Poland’s external balance.
We project a surplus of 1.5% of GDP this year as net exports is to be a major GDP growth driver. Poland’s external CA balance is to moderate over 2024-2025 in line with strengthening of consumer and domestic demand. Also, elevated spending on military equipment is to push imports up.
