Poland Macro Outlook 2024: Great Expectations

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• #1 Global economy – a soft landing ahead? Major central banks have managed to bring inflation close to the target without an unemployment increase. In fact, in both the US and the eurozone, the unemployment rate is at or near record lows, despite bold monetary policy tightening. We anticipate a policy shift by both the Fed and the ECB in the middle of 2024, with interest rates reduction of 75-100bps by the end of 2024. An interesting structural feature of developments in major economies is new industrial policy in the US (and to some extent in the EU). It aims at decarbonisation, reindustrialization, reduction of dependence on China and support for regions that have been economically neglected.
• #2 Is Poland an export powerhouse yet? Export expansion has been the main engine of the Polish economy since the EU accession in 2004 (at the same time, imports intensity of Polish exports has remained relatively high). Poland is progressively becoming a more open economy, with an exports-to-GDP ratio exceeding 60%. Despite increasing openness, the proportion of Poland’s value added generated by foreign demand remains lower than for the other CEE economies. The deterioration of the trade balance in 2021/2022 and its rapid improvement in 2023 were largely caused by a terms-of-trade shock. Further improvement of the current account and overall external position will be hindered by the economic recovery, particularly by the expected investment boom.
• #3 EU funds – a macro gamechanger? The political change in Poland has given hope for a relatively brisk inflow of EU funds from the Recovery and Resilience Facility (RRF) which are subject to the fulfillment of milestones (conditionality mechanism). Together with the RePowerEU component of the RRF, potentially available funds now amount to EUR 60bn. In particular, the RRF will help to fund investments improving energy efficiency, which are inevitable due to ambitious climate goals of the EU. In 2024 RRF funds are expected to provide a major inflow of EU funds amid relatively low absorption of funds related to the Cohesion Policy.
• #4 Fiscal policy: under pressure, but still under control. Poland's fiscal situation is steadily deteriorating against the background of the other EU countries - from the ranks of fiscal leader towards the bottom half of the EU economies. Poland's debt/GDP ratio declined by 10.3pp from its pandemic peak in 1q21, with positive impact of high inflation (the GDP deflator lowered the relation by 11pp) and relatively strong real economic growth (impact of -7pp). We expect that the fiscal deficit in relation to GDP will remain relatively high for longer, narrowing slowly from 5.9% in 2023 to 5.6% in 2024 and 4.7% in 2025. The space for further discretionary fiscal policy actions is significantly limited. Russian aggression against Ukraine has ended the „peace dividend” period and forced a surge in military spending. Energy crisis/transition is also a major burden on Poland’s public finances.
• #5 Labour market: a driver or a drag on economic growth. The Polish labour market has been resilient to the economic downturn in 2022-2023, with the unemployment rate at record low level. Nominal wage growth has been steadily at double-digit level, while real wage growth turned positive in the course of 2023 amid sharply falling inflation. Generous minimum wage hike in 2024 will maintain overall wage growth at a double-digit level. Labour demand has been subdued but it should gain strength along with expected economic recovery. However, the scale of employment growth will be limited by supply-side shortages related to declining working age population, which will only partially be offset by favourable net migration and potentially higher activity rates of women.
• #6 Consumption boom ahead. Solid GDP growth in 2h23 was only a prelude to an even stronger recovery in the following quarters. We forecast that GDP growth in 2024 will be close to 4%. Household consumption will be the key driving force behind the economic rebound, mainly due to improving real incomes (double-digit wage and pension growth, decreasing inflation, increased social transfers). Unfreezing of RRF funds will boost investments. 
• #7 Disinflation coming to a premature end. Our below-consensus forecast for CPI inflation in 2024 has received support from recent inflation data. Now we predict that the bottom of the disinflation will be even lower with CPI inflation at around 3% y/y in March-April 2024, very close to the NBP target of 2.5%. However, it would not be possible without high base effect and prolonged anti-inflationary measures. Rebounding demand will prematurely stop the disinflationary trend. The road towards (sustainable achievement of) the NBP target is still long.
• #8 Is there a space to cut interest rates? We expect that, weighing on the one hand the rapid demand recovery juxtaposed with still-high inflation, and on the other the global environment, the MPC will opt for cautious adjustments to monetary policy. The strong ongoing disinflation will provide room for a 25bps rate cut in March. The global environment may prompt the MPC to make another move towards the end of the year, likely in November. We anticipate that at the end of 2024 the NBP rate will be 5.25% against the current level of 5.75%.
• #9 PLN – stronger for longer. During 2023, the PLN strengthened significantly against major currencies. The real effective exchange rate indicates a significant strengthening of all currencies in the region. The strengthening of currencies supports central banks in curbing inflationary pressures, reducing pressure from import prices. A negative consequence of the PLN appreciation is the erosion of exports profitability. According to the NBP survey, the percentage of exporters with unprofitable exports has become the highest since 2011.
• #10. Is Poland still the top performer in the CEE? - We assess that Poland continues to exhibit one of the most optimal relationships between the strength of economic growth and economic sustainability among the CEE countries. Economic growth remains resilient to downturns (in 2023, Poland once again avoided a recession) and swiftly rebounds (in 2024, Poland may become a growth leader in the region). Simultaneously, this does not lead to imbalances — inflation, wage growth, fiscal deficit do not significantly differ from the region, and the pace of external balance restoration is the fastest among CEE countries.