The solid recovery continues

The Polish economy will recover in 2022 - it returned to its pre-pandemic level in the middle of 2021. Household consumption (58% of GDP) remains a crucial part of the economy. Its acceleration will be supported by increasing incomes, declining household savings, which soared during the pandemic, and changes in the personal income tax for low earners that will likely propel their consumption. Moreover, the labor market has weathered pandemic disruptions relatively well, with the unemployment rate approaching pre-pandemic levels in October 2021. Meanwhile, wage growth has turned solid again, reaching an 8.4% year-over-year increase in October 2021. Finally, the return of severe labor shortages will put further pressure on wage growth. However, the gain in purchasing power could be limited by accelerated inflation, which reached 7.7% in November 2021. Higher prices for commodities, supply chain disruption, and recovering demand, on the back of capacity constraints, have all fed it. Price pressure will remain high in 2022 with a further increase in energy prices, rising natural gas prices reverberating on food production costs, and overall high producer prices passed on to final consumers. Inflationary pressures prompted the central bank to tighten its monetary policy, as its inflation target is set at a 2.5% ±1 p.p. tolerance band. Moreover, the government introduced the so-called anti-inflationary shield at the beginning of 2022 to curb inflation. The program includes the following:

• The decrease of value-added and excise taxes on energy and natural gas.
• A reduction in taxes on fuels.
• A decrease of value-added tax on certain food products for six months.

Concomitantly, low-income households got a one-time benefit, which could increase inflation through higher consumption.

Investments are expected to stay robust after their acceleration in 2021, linked with increased capacity utilization. Even further interest rate hikes should not diminish businesses’ willingness to invest more in fixed assets, thanks to their favorable financial position.

The budget deficit has been narrowing

In 2022, the general government deficit-to-GDP ratio was expected to decrease further thanks to the phasing out of pandemic-related measures and the vivid economic recovery. Revenues from indirect taxes should increase despite the introduction of the costly new stimulus program called the Polish Deal. This fiscal package focuses on lowering taxes for the middle class, increasing health spending, and infrastructural investments (a network of expressways, railroad lines, the New Central Polish Airport, cultural and sports infrastructure in municipalities, and digital infrastructure) that should boost the economy from 2022 onwards. The increase in the tax burden for the wealthier part of society will not balance out its alleviation for the low- and mid-income taxpayers.

The current account balance turned positive in 2019 and has remained green in the following years, including our forecast for 2022. This relies on the trade in services, which continues to post the largest surplus, supported by transportation services abroad, and the rest in the trade in goods. Despite the contraction of external demand at the beginning of the pandemic, Polish exports rebounded relatively fast thanks to their competitiveness and inclusion in manufacturing supply chains. In 2022, exports were expected to increase. However, supply constraints will be a drag on their acceleration. Moreover, growing imports, supported by the domestic recovery, will limit the contribution of net exports to GDP growth.

The governing party’s lead shaken by defections

The ruling right-wing party Law and Justice (PiS) has narrowly won a second term in office in the latest parliamentary elections held in October 2019. However, its grip on power weakened after it lost control of the upper house (Senate) and failed to increase its absolute majority in the more powerful lower chamber (Sejm). Moreover, tensions in the coalition erupted in 2020 when the junior parties, United Poland (SP) and Agreement, refused to back legislation proposed by the PiS, which resulted in a cabinet reshuffle. The PiS lost the absolute majority in the lower chamber but still benefited from the support of several non-members in the voting process. Externally, the relationship with the European Commission remains tense, making the disbursement of EU recovery funds uncertain, which, if not paid, could drag on the recovery. These disagreements have already resulted in the Polish currency depreciation. In December 2021, the European Court of Justice (ECJ) advocated and generally recommended the ECJ dismiss the two lawsuits brought by Hungary and Poland against the rule-of-law conditionality mechanism introduced in 2020 for these funds. Both countries, which are the targets of this measure, have alleged that the tool lacked an appropriate legal basis, is incompatible with the EU treaty, and violates the principle of legal certainty. Moreover, the migration crisis at the border between Poland and Belarus in late 2021 has also brought additional risks.