EU growth champion performs but challenges loom
Poland’s growth over the last three decades has been unprecedented at around 4% on average. It has been driven by fast productivity growth, trade liberalization, FDI inflows, competitive wage levels, diversified industry, a large pool of competent workers, as well as a stable institutional environment, and EU integration. A large domestic market ensures a great deal of diversification of the economy, making it resilient to external shocks.
Poland has been growing fast despite the economy's deficiencies: sustained low investment rates, low R&D expenditures, and underperforming innovation. While low investment rates can be partially explained by a relatively high share of services in the economy, reasons for low innovation include a high share of intermediates in exports, occupying the production segments of value chains. However, FDI-driven knowledge spillovers and high human capital have contributed to sustained productivity growth.
The food and automotive sectors dominate manufacturing and are also the largest exporters. A recession in Germany and the disappointing performance of the automotive industry in the EU are contributing to a slowdown in Polish exports. On the other hand, Polish services such as road transport (the largest in the EU) and a booming ICT sector have an increasing role in the economy.
The GDP growth rate increased from 0.1% in 2023 to an expected 3.2% in 2024. The economic recovery should continue in 2025 at 3.8%.
Poland's political system is both fragmented and polarized. Cooperation between the current government and the current president is, at best, difficult. Conditional on the outcome of the 2025 presidential elections is the course of economic policy and badly needed fixes to the legal system.
Sustained expansionary fiscal and monetary policy contributed to an increase in inflation, which reached as high as 18.4% in February 2023. While the significant impact on the rise in prices was from the Russian invasion of Ukraine and its effect on energy prices, inflationary tendencies were present earlier, even before the COVID-19 pandemic. Negative real interest rates and universal social payments supported these tendencies.
While consumer inflation is declining, it currently hovers around 5%. An ongoing decline in energy prices and the regulation of consumer energy tariffs in 2025 will contribute to lowering inflation, as will the decline in producer prices and moderate consumer demand. However, real wage growth and a tight labor market might be moderating factors in this tendency. Overall, inflation is expected to fall further but at a slower pace than previously anticipated. The available forecasts for CPI inflation show 3.7% in 2024 and 4.4% in 2025 on average.
Public debt is expected to reach 54.7% of GDP in 2024 and continue to increase in the following years. The budget deficit is projected at 5.8 percent of GDP. While Poland is subject to the excessive deficit procedure imposed by the EU due to a high budget deficit in previous years, the required fiscal tightening has been made difficult with a significant increase in military spending (4.1% of GDP in 2024, 4.7% in 2025). However, the government plans to bring the debt and deficit under the prudential threshold by 2028.
The current fiscal situation is the aftermath of a procyclical fiscal policy in the years preceding the pandemic and the pandemic fiscal stimulus. Fiscal policy also responds to fluctuations in the political cycle and the calendar of presidential, parliamentary, and local elections.
Now read on...
Register to sample a report