- GDP will increase by 3.7% in 2024. In 2025 and 2026 it will fluctuate around 3%
- Inflation will hit the 2.5% NBP (National Bank of Poland) target by spring, after which it will rise and maintain at a high level of 3.5-5% until 2027
- Interest rates should remain at their current level in 2024 with predictions for further reductions to 5% in 2025
The European economy remains stagnant. Despite falling inflation, prices remain high, lowering real wages and the opportunities for consumption growth. Despite the end of the cycle of interest rate hikes, the high level is negatively affecting consumption and investment, particularly in housing.
However, a gradual recovery will occur in the coming quarters – lower inflation amidst a steady rise in wages will translate into an increase in real income and consumption, the global industry will exit the stagnation, supporting foreign demand, and the effects of tightening monetary policy will gradually fade. However, the European economy will grow slowly, hence the economic growth in the Eurozone will be only 0.8% throughout 2024 and will only accelerate in 2025, reaching 2.1% – according to EY European Economic Outlook, prepared by the EY Economic Analysis Team.
Against this backdrop, Poland, along with Hungary, can boast the best economic growth prospects for this year. The domestic economy began to emerge from stagnation in the second half of 2023, although the end of the year was slightly disappointing. The EY Economic Analysis Team estimates based on seasonally-adjusted data that GDP grew by 1.1% in Q3 2023 compared to the previous quarter and by around 0.3% in the 4th quarter, which is good indicator of further GDP growth in 2024 after a mild recession experienced in previous quarters.
Consumption has begun to slowly increase in the face of falling inflation and strong nominal wage growth, even though the end of the year was disappointing in this regard. At the same time, investment growth remains high, which is a result of the absorption of EU funds. We expect the economy to strengthen rapidly in subsequent quarters due to further fall in inflation, increasing purchasing power of Poles due to the valorization of social transfers for families to 800+ and increasing wages, driven by an increase in the minimum wage and a substantial wage rise in the public sector – says Marek Rozkrut, Partner EY, Head of the Economic Analysis Team, Chief Economist EY for Europe and Central Asia.
The EY Economic Analysis Team analysts expect that robust consumption growth will more than offset the expected slowdown in investment, which may drop in the 1st quarter of 2024 due to the phasing out of EU funding for the years 2014-2020. As a result, after a GDP growth of 0.2% in 2023, EY analysts predict that GDP will rise by 3.7% in 2024. In the following years (in 2025 and 2026), despite expected wage and consumption dynamics decline, GDP growth will be close to 3% thanks to investments funded from the National Recovery Plan and rebound in foreign demand.
Inflation in NBP’s target for a while
Our forecast published in July 2023, where we predicted a rapid drop in inflation to about 6.5% in the IV quarter of 2023, has materialized.
We expect inflation to continue to drop in the coming months. As a result, it should reach the NBP’s target of 2.5% by spring. However, this success will be short-lived – price increases in services will stabilize at about 6% in the second half of 2024 due to swift wage increases. Simultaneously, the restoration of standard VAT rates on food that we anticipate in July 2024, and the phasing out of household protection programs related to energy prices from 2025, will push inflation above NBP’s target. In such a scenario, energy prices will continue pushing inflation further up, maintaining it at a level of 3.5-5% until 2027, that is until the end of the period covered by our forecast – says Maciej Stefański, Senior Economist from the EY Economic Analysis Team .
Central and Eastern Europe is the region within the European Union where inflation remains at the highest levels. Inflation in the Eurozone should permanently reach the inflation target of 2% in the second quarter of 2024.
2024: A year without rate cuts in Poland
The National Bank of Poland (NBP) changed its rhetoric on interest rates after the parliamentary election in October 2023. We expect it to maintain the current level of rates throughout 2024. The reason being a progressing economic recovery, an expansive fiscal policy, and core inflation maintaining above the NBP’s inflation target. When the rate of wage growth and the prices of services slows down, which should occur in 2025, we expect the central bank to decide on interest rate cuts reaching the level of 5%. High inflation will however prevent further reductions.
Major central banks globally are expected to pursue a differing policy. The European Central Bank, the Federal Reserve, and the Bank of England are expected to begin a cycle of loosening monetary policy in the April-June 2024 period as they approach the inflation target of 2%. By the end of this year, interest rates should be lowered by 1 percentage point from the current level predicted by EY analysts.
Risk Factors
The prolonged recession in the industrial sector in Europe and stagnation in world trade are the main risk factors for economic development in Europe. Geopolitics is also significant: the potential escalation of war in Ukraine, conflict in the Middle East, or tensions in relations between China and Taiwan could lead to an increase in commodity prices and maritime transport, causing further disruptions in supply chains.
Consumption may positively surprise – if Europeans decide to unleash some of the savings accumulated during the pandemic due to falling interest rates and improving moods, the EU’s GDP may grow faster than forecast.
