Looking through the lens of the most important macroeconomic phenomena and trends that dominated the Polish economy in 2023 and their implications for 2024, it is worth noting: our economy surpassed the peak of inflation in the first quarter of 2023 and the cyclical trough with respect to economic growth in the second quarter of 2023 – this year inflation will be noticeably lower, while economic growth will gain momentum. The positive is the record low unemployment rate – but at the same time the shrinking labor force will be an increasing challenge for the economy; the response should be a stimulation of investments. Public finances remain a challenge – we have too high a deficit, the new government will have to seriously address its reduction.
Passed the trough of the economic cycle in mid-2023
In the second quarter of 2023, GDP growth was negative, reaching -0.6% year-on-year. This was a cyclical trough from which the next cycle of economic recovery began. In the fourth quarter of 2023, GDP growth likely exceeded 2% year-on-year. The year 2024 will be characterized by systematic acceleration: in the last quarter of 2024, growth rate may reach 4% year-on-year, with growth for the entire 2024 exceeding 3% year-on-year.
Passed the inflation peak
In February 2023, the CPI inflation index reached a level of 18.4% year-on-year, by the end of 2023, CPI fell to 6.1%. The downward trend will be continued until February/March 2024, when inflation most likely will fall to at least 4% year-on-year, and possibly, as some forecasts suggest, reach 3.0% year-on-year. Later in the year, we will see an inflationary rebound, and by the end of 2024, the CPI will reach a level of about 7%. In the medium term, i.e. over the next few or a dozen quarters, it is highly unlikely that inflation will reach the Monetary Policy Council (RPP) inflation target of 2.5%, mainly due to wage pressure resulting from a shrinking labor force in our economy and a very expansionary fiscal policy (high deficits).
Record high number of people working in the economy and record low unemployment rate – the lowest in the entire EU
Despite a weak economic growth rate in 2023, the labor market situation was stable. The number of employed people increased and the unemployment rate remained at an all-time low – and at the lowest level in the entire EU. From the perspective of employees, these are very good news, at least in the short and medium term, as they indicate a strong position of the employee in relation to the employer, job security and maintaining wages at market level. From the perspective of the entire economy, unfortunately, we face a serious supply constraint and a shrinking labor force. Employers have difficulty recruiting workers with the required skills, which limits the growth potential of individual enterprises and consequently, the entire economy. Such a low level of unemployment, including record low unemployment rates in major urban centers (1.5 to 2%) are a sign of a very tight labor market situation. When the economy begins to accelerate, this situation will translate into very strong wage pressure, which in turn will cause a deterioration in competitiveness. Wage pressure will mean higher costs for businesses and consequently higher costs of their products and services. In the longer term, this will mean higher costs for all consumers, especially for services with a significant human labor component. This will be one of the most important challenges for the second half of 2024. The response should be further flexibility of the labor market, including solutions that allow part-time work or those that encourage retirees to work. An increasingly urgent issue will be to develop immigration and assimilation policies. Given the demographic situation, Polish employers will increasingly have to employ foreign workers. It is important that this process takes place under appropriate conditions and that we invite those who want to work, not collect benefits.
Record high level of public finance sector deficit
The deficit in 2023 is close to 6% of GDP, and in 2024 it will clearly exceed 5% of GDP. Such a high level of deficit in 2024, when economic growth will be close to potential or even exceed it, is particularly worrying. Classic rules for conducting fiscal policy state that in a year when actual economic growth is above the estimated potential growth level, we should not have a deficit at all – we should have a budget surplus, which would repay debts incurred in periods of weaker climate and build room for stimulating the economy when growth is below potential. Unfortunately, in Poland in 2024, we will face a very high deficit for public finance sector (in nominal terms the highest in history), in a situation of strong economic growth. This is one of the signs of a very serious disease of the public finance system in Poland. Investors will carefully watch whether the new government intends to consolidate public finances, including cut expenditures – or continue a policy of high deficits funded by an increase in debt. In the latter scenario, we would have to expect high debt service costs and a weakening of the zloty.
Potential for launching investments that would be the engine of a sustainable, non-inflationary growth
The year 2024 will be marked by launching EU funds and measures under the KPO (National Recovery Plan). These are good news. These factors will drive economic growth. From a strategic perspective, launching private sector investments is more important. First and foremost, the “regulatory front” needs to be calmed and a reliable consultation of proposed legislative and tax changes provided, rigorous regulation impact assessment procedures implemented and a longer vacatio legis ensured. It is good that a declaration of actions in this direction is included in the coalition agreement of the new government. It would also be necessary to review and remove the most harmful regulations for business development, among others those introduced by the so-called “Polish Deal”. An important issue will be to review existing legislation encouraging investment and answer the questions: Do the laws passed by the previous government fulfill their task? Shouldn’t they be recalibrated?
One of the more strategically important tasks will be to start work on a thorough overhaul of our tax system, to transform from the current situation of the most convoluted and the hardest “to use” system in entire Europe into a system that is transparent, consistent, logical and easy “to handle”.
Author: Marcin Mrowiec, Business Centre Club expert for economics
