Global energy crisis, the highest level of interest rates for many years, fear of world war and the biggest geopolitical tensions since 1989, massive immigration, onset of a 3-year long election period (2023 parliamentary, 2024 – municipal, European Parliament, 2025 – presidential) - all these factors make forecasting for Poland in 2023 extremely difficult. The environment won’t be supportive for the Polish economy, which might result in the weakest GDP growth ever (in the history of comparable data since 1995, excluding the pandemic recession in 2020). Poland’s fundamentals, however, remain solid which means that 2023 is just a temporary power outage.
- #1 External environment: less grim than feared. The external environment of the Polish economy remains challenging. 2023 will be marked by disinflation, heralded by easing supply tensions, falling commodity prices and slowing producer prices. Central banks face a dire choice in which there are no good solutions - stabilize the economy at the cost of a slower disinflation, bearing the risk of unanchoring inflation expectations, or continue to aggressively fight inflation, accepting the risk of a deep recession. Regardless of the choice, the risk of error (policy mistake) is high. Europe in 2022 managed to avoid the black scenario of a severe energy crisis, but it is a battle won, not a war. The energy crisis is a developing story, maintaining its negative impact on economic growth, but reducing its pass-through to inflation.
- #2 Growth prospects: not as bad as it seems at first sight. Poland will be teetering on the brink of recession of a specific nature. Private consumption, increasingly suppressed by the decline in real income and the dry loan tap, will be the weakest link in the domestic final sales. In 2h23, as inflation falls, the situation will improve. Reshoring/nearshoring/friendshoring will make Polish exports resist the global decline in demand. The need to reduce the energy intensity of the economy and the inflow of foreign capital will support investment demand. The Recovery Plan, if implemented in 2023, could help public investment demand to recover after being suppressed by rising investment goods’ prices and a transition between old and new EU budgets.
- #3 Labour market: lower real wages, stable unemployment. Labour market conditions remain favourable, although there are signs of some deterioration. Labour demand has started to weaken in 2022 and households’ fears of unemployment have grown stronger, whereas businesses still find it hard to fill vacant places. These contradictory tendencies suggest that labour market adjustment to economic slowdown will take place mainly through the wage channel (lower real wages). Any reduction in employment is likely to apply in the first place to foreign workers, stressing the dual nature of the domestic labour market.
- #4 Inflation outlook: disinflation with sticky core inflation. 2023 will be marked by a strong (over 10pp) decline in CPI inflation. It will mirror fading post-war shocks and declining domestic demand, which will limit core inflation. However, the way towards inflation target will be long and bumpy. Energy prices, capped by the government in 2023, will be the key proinflationary factor in the medium-term.
- #5 Monetary policy: rate cuts on the cards. Inflation shock has prompted the record strong and record-fast cycle of interest rate hikes in Poland. At the end of 2022, the MPC has announced a pause in the tightening cycle and entered the wait-and-see mode. As CPI inflation is expected to fall significantly in the course of 2023, the markets have started to price in first rate cuts before the year-end, which is in line with our baseline scenario. As inflation is projected to decline, real rates will keep growing.
- #6 Fiscal policy: under pressure, but under control. 2023 will be a challenging year for public finances. Protective measures against energy shock will be the key driver of fiscal deficit widening (to 5.1% of GDP). Substantially increased defence spending will become a permanent element of the public spending landscape. A spike in interest rates will increase debt servicing costs - we estimate that by approx. 0.7-0.9% of GDP. In 2023, most of the fiscal deficit will be recorded by off-budget units. Still double-digit nominal GDP growth means that the ratio of public debt to GDP (ESA) will increase only slightly in 2023.
- #7 Balance of payments: more resilient than regional peers. Since the start of the energy shock in 2021, Poland’s current account balance deteriorated by more than 6% of GDP, to a deficit of nearly 4% of GDP in late 2022. The deterioration was caused by a widening trade gap, seen mainly in the case of mineral fuels, that was caused by adverse terms-of-trade shock. However, current account deficit in Poland is narrower than in Hungary and Czech Republic, and it is fully financed by record strong FDIs inflow. The FDI inflow is likely to further boost exports this year. The current account balance is set to improve, as adverse shocks fade away and companies reduce their inventories.
- #8 Macroeconomic stability: Poland still outperforming. Poland's economic fundamentals remain stable, which is confirmed, among others, by one of the best positions in the EU in the Macroeconomic Imbalances Procedure of the European Commission. Much can still be improved, but Poland achieves at least average results in almost all macrostability areas.
- #9 Borrowing needs and PLN outlook. Unprecedented conditions of financing government borrowing needs may occur in 2023. A flood of issuance across Europe (incl. the EU itself) while the ECB reduces its balance sheet could exert some indirect pressure on the Polish market. Some portion of borrowing needs in Poland will have to be covered by off-budget vehicles (mostly by the state development bank BGK). PLN fate depends mostly on sentiment in global markets and potential swings in geopolitical risk, while fundamentally the local currency remains undervalued.
- #10 Housing market: transitory freeze. Housing demand is at its bottom with a prospect for a gradual recovery in 2023. In our opinion housing sales will go up by 15% in 2023 as a result of interest rates cuts, improved affordability (wages rising faster than house prices) and planned public support for first-time buyers. The supply side response to slump in demand in 2022 was a strong decline in the number of housing starts. We expect that annual change in average sqm price in 2023 will be -5%.