Economic Uncertainty Looms for 2024: Złoty Expected to Weaken, Euro May Suffer

The passing year has primarily been a period of exceptionally high inflation. Governments, businesses, and consumers not only in Poland but across the globe have had to grapple with this issue. The central banks in the US and the eurozone hiked their interest rates for the majority of the year, thereby tightening their monetary policy. There was a noticeable slowdown in inflation in the eurozone (HICP year on year inflation in November was 2.4%) and the US (CPI year on year inflation in November sat at 3.1%) in recent months, prompting strong expectations that both the ECB and the Fed will significantly lower interest rates in 2024.

In Poland, after springtime records of price increases, there was a noticeable deceleration in consumer inflation in the following months. After the CPI annual inflation reached its peak in February (18.4%), the growth dynamic year on year slowed down to 6.5% in November. Meanwhile, the slowdown in CPI inflation in Poland was an argument for the Monetary Policy Council to surprise the financial markets in September with a sharp interest rate cut of 75 basis points, followed by another interest rate cut at a meeting in October. Still, the subsequent shift in the NBP’s monetary policy in November when the MPC began indirectly signaling the stability of interest rates at least until March 2024 was surprising, coinciding with the results of the October parliamentary elections in Poland.

Concerning economic growth, hopes for a more significant economic recovery in the euro area at the beginning of this year have not been fulfilled. From spring, weaker leading indicators (PMI, IFo) began to flow from Germany, and the largest European economy dragged the entire eurozone into economic stagnation over the summer. The likelihood of a mild recession in the eurozone in the second half of 2023 is high. On the other hand, US economic growth was surprisingly strong this year, and the resilience of the American economy continues to amaze. However, it should be added that a significant factor here was the very expansive fiscal policy of the American government. Considering these circumstances, the Polish economy did not do so badly this year, growing both quarter to quarter (1.4% q/q) and year to year (0.5% y/y). Poland is one of the EU countries that have rebuilt their economies the fastest after the pandemic.

Strong zloty

In the currency market in the first half of this year, the USD didn’t fare the best against the EUR, which, with certain exceptions (a minor banking crisis in March), depreciated to just below 1.13 USD/EUR in the second half of July. However, from the end of July to the end of October, the dollar did well, strengthening to the level of 1.05 USD/EUR and making up for losses from the first half of the year. However, at the beginning of November, the American currency began to lose value again after financial markets stopped believing that the US Fed would continue to raise interest rates. The PLN’s exchange rate against the EUR became more exciting only in the II quarter of 2023 when the zloty was slightly above the level of 4.40 PLN/EUR. The EURPLN currency pair has been characterized by high volatility since September. At the beginning of September, the zloty first weakened quite strongly to a level just below 4.70 PLN/EUR in response to a significant lowering of interest rates by the MPC, then in October and November, it strengthened just as dramatically to almost 4.30 PLN/EUR, in response to the results of the parliamentary elections in Poland and the information that the MPC would not further reduce interest rates.

What can we expect next year?

Despite a rather positive end to 2023 (strong stock market growth in November), I believe that we should not have overly optimistic expectations for the next year because several risk factors persist, which I will discuss below.

Financial markets’ expectations that central banks in the United States and the eurozone will radically cut interest rates next year are very optimistic. Similarly, the potential growth for the eurozone and the USA next year is low. Although consumer inflation will decrease, high interest rates will impact negatively in many aspects (households and businesses, as well as the entire economy, will feel this). In 2024, the eurozone will also tighten its fiscal policy.

On the other hand, the recession from which the US managed to escape this year will hit the American continent next year. An important factor here will be the combination of dwindling American household savings after the pandemic and high interest rates. Whether it will be a soft landing or a deeper economic recession in the USA can only be speculated at this point. Additionally, there are presidential elections in the States in 2024, and no ruling party would want an election year during a recession. Even from this perspective, 2024 can bring many surprises and uncertainty.

In the eurozone, a combination of high interest rates and weak nominal GDP growth may lead to a repeat of the euro crisis, this time with the epicenter in Italy. Poland’s economy should benefit mainly from a revival in domestic demand (both from households and the government sector) in 2024, less so from investments, and foreign demand development is questionable. Assuming nothing extraordinary happens, Poland’s economy growth in 2024 should be between 2-3%.

High uncertainty of the zloty

I assume that the European economy will be on the brink of stagnation and a mild recession at least for the first half of next year, and that core inflation will also be above the European Central Bank’s inflation target of 2%. Another likely scenario is that the ECB will start cutting interest rates earlier (in the II quarter) and faster than the US Fed next year. This will lead to a weakening of the EUR against the USD, but I assume that at the end of 2023 and the first quarter of 2024, the exchange rate will mainly fluctuate between 1.05-1.10 USD/EUR. As for the zloty, I expect a gradual weakening of the Polish currency. First, I assume that the euphoria after the parliamentary election results will start to fade and the zloty will give up some of its gains. Second, I assume that CPI inflation in Poland will be much higher next year than in the euro zone, while the real interest rates in the euro zone will be positive (nominal interest rates minus inflation), so in Poland, real interest rates may be around zero or even negative. Third, the zloty is sensitive to increased risk aversion in financial markets, and I expect that next year we will witness negative surprises. Therefore, Polish businesses should prepare for these scenarios and ensure their finance and security of currency transactions. Even smaller enterprises in the SME sector have such possibilities, thanks to specialized payment institutions, which allow them to hedge the exchange rate for a specific contract or to exchange currencies quickly and favorably. Such additional solutions will be very useful in the quite unpredictable year 2024 ahead of us.

Forecast for currency exchange rates in 2024
Source: Akcenta

Miroslav Novák, Chief Analyst of the international payment institution Akcenta