Poland's economy has demonstrated more resilience and strength than many economists initially predicted.
Statistics Poland (GUS), the Polish statistics office, recently reported that the country's GDP increased by 3.2% year-on-year in the second quarter, marking the fastest economic growth since 2022. This growth came as a significant surprise, as most market forecasts had predicted a more modest increase of 2.8%.
Additionally, when adjusted for seasonal factors, GDP grew by 4%, placing Poland as the top performer in the EU, according to Eurostat.
These figures indicate that after the quasi-recession that occurred at the turn of 2022-2023, the Polish economy is recovering faster than many had expected. While GUS has not yet released detailed data on the drivers of this growth, economists believe that the better-than-expected results are primarily due to strong consumer spending. This spending is particularly evident in the services sector, which is less frequently captured in monthly statistics. This explains the unexpected positive uptick, as monthly retail sales data typically focus on goods rather than services.
However, this rapid economic growth might be a double-edged sword, especially for those repaying loans. Such strong economic performance is unlikely to prompt the Monetary Policy Council (MPC) to lower interest rates anytime soon, as the data suggests that the economy does not currently need a rate cut and is performing well without one. This sentiment has been echoed in the currency markets, where the Polish złoty strengthened significantly following the GDP report. As a result, the U.S. dollar is now trading at around PLN 3.86, the lowest level since September 2021.
Government considering extension of energy price protections
There appears to be a strong political will within the Polish government to extend measures aimed at protecting households from higher electricity prices for another year. Both Prime Minister Donald Tusk and Finance Minister Andrzej Domański have indicated this in recent public statements. However, they have not yet clarified whether they are considering only an extension of the existing energy voucher scheme or also continuing the price freeze for all households.
Tusk said: "We are looking for solutions that will protect those who are struggling the most, and our policy in this regard will not change." Meanwhile, Domański mentioned in an interview with private broadcaster Polsat News that specific "protective measures" would be included in the 2025 budget proposal. He added that he had discussed this matter with Paulina Hennig-Kloska, the climate and environment minister, who recently suggested that the freeze on household electricity prices at the current level of PLN 500 (€ 117) per megawatt-hour might need to be maintained into the next year.
In the wholesale market, electricity prices have been below this level for several months but have started to rise gradually in recent days. For instance, on Friday, the contract price for one megawatt-hour of electricity for delivery next year was close to PLN 475 (€ 111), representing a 2.7% increase from the end of July. This upward trend in wholesale prices might influence the government's decision on whether to maintain the current price freeze.
Political consensus on energy prices, but other divisions remain
The issue of curbing electricity price increases for households is one of the few areas where there is no significant disagreement among the coalition partners in the Polish parliament.
However, the situation is much more complicated regarding other policy matters.
Tusk wants to establish a unified action plan and avoid mutual obstruction by partners in Poland’s ruling coalition on key issues such as the planned reduction of health insurance contributions or the introduction of housing loan subsidies.
For the second time in recent weeks, he announced his intention to reach a consensus with his coalition partners by October 15. His goal is to establish a unified action plan and avoid mutual obstruction on key issues such as the planned reduction of health insurance contributions or the introduction of housing loan subsidies.
"There is a problem because there are fundamental disagreements, particularly regarding the 'zero percent loan' proposal,” said Tusk. But he added: “There is no pressure. We will jointly seek a solution that will realistically accelerate housing construction. I am open to suggestions from coalition partners."
Additionally, when adjusted for seasonal factors, GDP grew by 4%, placing Poland as the top performer in the EU, according to Eurostat.
These figures indicate that after the quasi-recession that occurred at the turn of 2022-2023, the Polish economy is recovering faster than many had expected. While GUS has not yet released detailed data on the drivers of this growth, economists believe that the better-than-expected results are primarily due to strong consumer spending. This spending is particularly evident in the services sector, which is less frequently captured in monthly statistics. This explains the unexpected positive uptick, as monthly retail sales data typically focus on goods rather than services.
However, this rapid economic growth might be a double-edged sword, especially for those repaying loans. Such strong economic performance is unlikely to prompt the Monetary Policy Council (MPC) to lower interest rates anytime soon, as the data suggests that the economy does not currently need a rate cut and is performing well without one. This sentiment has been echoed in the currency markets, where the Polish złoty strengthened significantly following the GDP report. As a result, the U.S. dollar is now trading at around PLN 3.86, the lowest level since September 2021.
Government considering extension of energy price protections
There appears to be a strong political will within the Polish government to extend measures aimed at protecting households from higher electricity prices for another year. Both Prime Minister Donald Tusk and Finance Minister Andrzej Domański have indicated this in recent public statements. However, they have not yet clarified whether they are considering only an extension of the existing energy voucher scheme or also continuing the price freeze for all households.
Tusk said: "We are looking for solutions that will protect those who are struggling the most, and our policy in this regard will not change." Meanwhile, Domański mentioned in an interview with private broadcaster Polsat News that specific "protective measures" would be included in the 2025 budget proposal. He added that he had discussed this matter with Paulina Hennig-Kloska, the climate and environment minister, who recently suggested that the freeze on household electricity prices at the current level of PLN 500 (€ 117) per megawatt-hour might need to be maintained into the next year.
In the wholesale market, electricity prices have been below this level for several months but have started to rise gradually in recent days. For instance, on Friday, the contract price for one megawatt-hour of electricity for delivery next year was close to PLN 475 (€ 111), representing a 2.7% increase from the end of July. This upward trend in wholesale prices might influence the government's decision on whether to maintain the current price freeze.
Political consensus on energy prices, but other divisions remain
The issue of curbing electricity price increases for households is one of the few areas where there is no significant disagreement among the coalition partners in the Polish parliament.
However, the situation is much more complicated regarding other policy matters.
Tusk wants to establish a unified action plan and avoid mutual obstruction by partners in Poland’s ruling coalition on key issues such as the planned reduction of health insurance contributions or the introduction of housing loan subsidies.
For the second time in recent weeks, he announced his intention to reach a consensus with his coalition partners by October 15. His goal is to establish a unified action plan and avoid mutual obstruction on key issues such as the planned reduction of health insurance contributions or the introduction of housing loan subsidies.
"There is a problem because there are fundamental disagreements, particularly regarding the 'zero percent loan' proposal,” said Tusk. But he added: “There is no pressure. We will jointly seek a solution that will realistically accelerate housing construction. I am open to suggestions from coalition partners."
Debates on health insurance contribution cuts for entrepreneurs
Another sore point among the ruling coalition is the proposal to reduce health insurance contributions for entrepreneurs. This idea has been strongly advocated by PSL and Poland 2050, but it has met with resistance from the Left and considerable reluctance from the Civic Coalition. The Finance Ministry also has reservations about this proposal, as it would increase the public finance deficit. As a result, various ideas are being floated to soften, dilute, or postpone the proposal.
Deputy Finance Minister Jarosław Neneman, speaking to private broadcaster Tok FM radio, said that the ministry does not rule out delaying the reduction in health insurance contributions until the second or even the third quarter of next year. He cited the necessary adjustments to the IT system at ZUS (Poland’s Social Insurance Institution), which would require more time. However, it is also understood that postponing the reduction from the beginning of the year to mid-year would automatically reduce its cost to the state in 2025. Neneman also mentioned the possibility of introducing an interim solution on the way to the final reduction of the contribution, although he did not specify what this might entail.
However, he clearly indicated that this approach to mitigating the impact of the contribution reduction on public finances in 2025 is under serious consideration.
Domański said at the end of July that reducing health insurance contributions for entrepreneurs would cost PLN 4 billion (€ 940 million). This amount would have to be additionally transferred to the National Health Fund (NFZ) from the state budget to avoid reducing state spending on healthcare, highlighting the fiscal challenges involved.
Growing budget deficit despite rising revenue
Meanwhile, the financial condition of Poland's budget is showing no signs of improvement. In July, the budget deficit reached nearly PLN 13 billion (€ 3.04 billion), bringing the total deficit since the beginning of the year to almost PLN 83 billion (€ 19.4 billion). This widening deficit persists despite continuously rising tax revenues. For example, VAT revenues this year are 20% higher than last year, while PIT revenues have increased by 30%. Although the budget is experiencing a nearly 25% drop in CIT revenues, total tax revenues are still growing by nearly 12%.
However, government expenditures are increasing at an even faster rate, exceeding 30%, leading to the rapidly growing deficit. The increased spending is primarily due to wage increases in the public sector that were implemented at the beginning of this year, as well as the increase in the family benefit previously known as "500 plus" to PLN 800 (€ 187) per child. Additionally, the state’s expenditures are further burdened by the costs associated with defense-related investments, adding to the fiscal strain.
Another sore point among the ruling coalition is the proposal to reduce health insurance contributions for entrepreneurs. This idea has been strongly advocated by PSL and Poland 2050, but it has met with resistance from the Left and considerable reluctance from the Civic Coalition. The Finance Ministry also has reservations about this proposal, as it would increase the public finance deficit. As a result, various ideas are being floated to soften, dilute, or postpone the proposal.
Deputy Finance Minister Jarosław Neneman, speaking to private broadcaster Tok FM radio, said that the ministry does not rule out delaying the reduction in health insurance contributions until the second or even the third quarter of next year. He cited the necessary adjustments to the IT system at ZUS (Poland’s Social Insurance Institution), which would require more time. However, it is also understood that postponing the reduction from the beginning of the year to mid-year would automatically reduce its cost to the state in 2025. Neneman also mentioned the possibility of introducing an interim solution on the way to the final reduction of the contribution, although he did not specify what this might entail.
However, he clearly indicated that this approach to mitigating the impact of the contribution reduction on public finances in 2025 is under serious consideration.
Domański said at the end of July that reducing health insurance contributions for entrepreneurs would cost PLN 4 billion (€ 940 million). This amount would have to be additionally transferred to the National Health Fund (NFZ) from the state budget to avoid reducing state spending on healthcare, highlighting the fiscal challenges involved.
Growing budget deficit despite rising revenue
Meanwhile, the financial condition of Poland's budget is showing no signs of improvement. In July, the budget deficit reached nearly PLN 13 billion (€ 3.04 billion), bringing the total deficit since the beginning of the year to almost PLN 83 billion (€ 19.4 billion). This widening deficit persists despite continuously rising tax revenues. For example, VAT revenues this year are 20% higher than last year, while PIT revenues have increased by 30%. Although the budget is experiencing a nearly 25% drop in CIT revenues, total tax revenues are still growing by nearly 12%.
However, government expenditures are increasing at an even faster rate, exceeding 30%, leading to the rapidly growing deficit. The increased spending is primarily due to wage increases in the public sector that were implemented at the beginning of this year, as well as the increase in the family benefit previously known as "500 plus" to PLN 800 (€ 187) per child. Additionally, the state’s expenditures are further burdened by the costs associated with defense-related investments, adding to the fiscal strain.
Rising household incomes amid public sector deficit
One fundamental economic principle suggests that a larger public sector deficit often results in surpluses in the private sector, benefiting businesses and households. This concept is supported by new data from the Organization for Economic Cooperation and Development (OECD). According to the OECD, Poland had the fastest growth in household incomes among all OECD countries at the beginning of this year. Specifically, household income increased by more than 10% per capita, adjusted for inflation. Following Poland in this ranking are Portugal, with a 6.7% increase, and Chile, with a 5.2% increase, while the OECD average is just 0.9%. Notably, real household incomes in countries like the Czech Republic and Hungary actually decreased during this period.
The OECD reports that the significant income growth in Poland is mainly attributed to wage increases (including a more than 10% increase in the minimum wage since January and raises in the public sector), social benefits (such as the "800 plus" program), and property income. The OECD highlights that property income in Poland has more than tripled since the end of 2021, largely due to increased interest income amid higher interest rates.
While this rapid income growth is excellent news for consumers, who now have more disposable income, it also carries potential risks. For instance, if consumers begin to spend more aggressively, this could fuel inflation, leading to further economic challenges.
Inflation and interest rate prospects
Regarding inflation, it’s important to recall that GUS recently confirmed preliminary data from two weeks ago, showing that inflation in July jumped to 4.2%. The full report reveals that energy prices increased by an average of 19.9% in July, while gas prices rose by 16.8%. These were the primary contributors to the inflation increase. Without these energy and gas price hikes, inflation in July was virtually nonexistent, as price increases for some goods were offset by price decreases for others.
For example, food prices fell by 0.5% in July, while clothing and footwear prices dropped by 3.1%. On the other hand, prices in the "recreation and culture" category rose by 2.1%, mainly due to more expensive domestic and international trips. Fuel prices, however, remained stable throughout the month.
According to many economists, after the sharp but one-off inflation increase in July, inflation is expected to stabilise for the rest of the year. It might temporarily rise above 5% in the coming months, but it is likely to fall below this level by December. In 2025, inflation is expected to peak around 6% in the first few months and then gradually decrease. This anticipated decline could eventually lead to the first interest rate cuts in the country, providing some relief to borrowers and possibly stimulating economic activity.
Improvement in the Polish labor market
The Polish labor market is beginning to show signs of improvement. Recent reports had indicated a slight increase in unemployment, but now there is data showing that the number of job offers is also rising. This suggests that there is growing demand for labor from businesses. According to a report by Grant Thornton, there were a total of 297,800 job ads posted on online recruitment platforms in July, which represents a 4% increase from June and a 9% increase from a year ago. Importantly, this is the first such increase in a while, following a months-long decline that began in April 2023. The report’s authors predict that employment, which had recently been declining in enterprises, is expected to grow again in the second half of the year.
In July, the most significant increase in job offers was recorded in the medical sector, with companies posting 30% more offers than a year ago. There was also increased demand for manual workers (up 9%) and lawyers (up 6%), indicating a broad-based recovery in the demand for labor across different sectors of the economy.
One fundamental economic principle suggests that a larger public sector deficit often results in surpluses in the private sector, benefiting businesses and households. This concept is supported by new data from the Organization for Economic Cooperation and Development (OECD). According to the OECD, Poland had the fastest growth in household incomes among all OECD countries at the beginning of this year. Specifically, household income increased by more than 10% per capita, adjusted for inflation. Following Poland in this ranking are Portugal, with a 6.7% increase, and Chile, with a 5.2% increase, while the OECD average is just 0.9%. Notably, real household incomes in countries like the Czech Republic and Hungary actually decreased during this period.
The OECD reports that the significant income growth in Poland is mainly attributed to wage increases (including a more than 10% increase in the minimum wage since January and raises in the public sector), social benefits (such as the "800 plus" program), and property income. The OECD highlights that property income in Poland has more than tripled since the end of 2021, largely due to increased interest income amid higher interest rates.
While this rapid income growth is excellent news for consumers, who now have more disposable income, it also carries potential risks. For instance, if consumers begin to spend more aggressively, this could fuel inflation, leading to further economic challenges.
Inflation and interest rate prospects
Regarding inflation, it’s important to recall that GUS recently confirmed preliminary data from two weeks ago, showing that inflation in July jumped to 4.2%. The full report reveals that energy prices increased by an average of 19.9% in July, while gas prices rose by 16.8%. These were the primary contributors to the inflation increase. Without these energy and gas price hikes, inflation in July was virtually nonexistent, as price increases for some goods were offset by price decreases for others.
For example, food prices fell by 0.5% in July, while clothing and footwear prices dropped by 3.1%. On the other hand, prices in the "recreation and culture" category rose by 2.1%, mainly due to more expensive domestic and international trips. Fuel prices, however, remained stable throughout the month.
According to many economists, after the sharp but one-off inflation increase in July, inflation is expected to stabilise for the rest of the year. It might temporarily rise above 5% in the coming months, but it is likely to fall below this level by December. In 2025, inflation is expected to peak around 6% in the first few months and then gradually decrease. This anticipated decline could eventually lead to the first interest rate cuts in the country, providing some relief to borrowers and possibly stimulating economic activity.
Improvement in the Polish labor market
The Polish labor market is beginning to show signs of improvement. Recent reports had indicated a slight increase in unemployment, but now there is data showing that the number of job offers is also rising. This suggests that there is growing demand for labor from businesses. According to a report by Grant Thornton, there were a total of 297,800 job ads posted on online recruitment platforms in July, which represents a 4% increase from June and a 9% increase from a year ago. Importantly, this is the first such increase in a while, following a months-long decline that began in April 2023. The report’s authors predict that employment, which had recently been declining in enterprises, is expected to grow again in the second half of the year.
In July, the most significant increase in job offers was recorded in the medical sector, with companies posting 30% more offers than a year ago. There was also increased demand for manual workers (up 9%) and lawyers (up 6%), indicating a broad-based recovery in the demand for labor across different sectors of the economy.
Source: TVP World
More In Business MORE...
