According to the EY European Economic Outlook report, Poland’s GDP growth is projected to accelerate to 3.5% in 2025, compared to an estimated 2.9% in 2024. The GDP growth for 2024 was below expectations; however, Poland’s economy is still developing relatively quickly compared to other European countries. The primary driver of this growth is government spending related to social benefits, increasing public sector wages, and military investments. Furthermore, consumption saw a significant increase of 3.1%, while exports rose by only 1%. In contrast, private investments dropped by about 5%, influenced by the current phase of financing from EU funds, high interest rates, and declining margins.
In 2025, consumption is expected to continue growing at the current rate of approximately 3%, while investments and exports will pick up pace with expenditures funded by the European Recovery Fund and a revival in external demand. This year, inflation is anticipated to remain around 5%, similar to the fourth quarter of the previous year. Inflation will be sustained by a significant increase in excise duties on tobacco products, continued rising food prices, and further hikes in regulated energy prices. Inflation is not expected to return to the NBP’s target of 2.5% until 2028. Interest rate cuts by the NBP will likely not occur until after the presidential elections, with the central bank president indicating a postponement of the easing cycle until the second half of the year. Consequently, the EY economic analysis team expects rate cuts of 75 basis points in 2025, 2026, and 2027, resulting in a reference rate of 3.5% by the end of 2027.
When comparing quarter-on-quarter, it is evident that during the second half of 2024, the European economy grew at a notably moderate pace, fluctuating between 0.1% and 0.3%. While real income growth gradually translated into increased consumption, export activity declined due to ongoing challenges faced by the industrial sector. Investment activity remained relatively low due to still restrictive monetary policies, limited external demand, and lower margins. Despite the recent deterioration in economic sentiment, EY economists still expect GDP growth to gradually accelerate in 2025. Easing of monetary policy will support further consumption growth by encouraging lower saving rates. Lower interest rates, NextGenerationEU spending, and stronger consumer demand should bolster investments, particularly in the housing sector. Most importantly, exports are expected to finally increase, aided by euro depreciation and a moderate uptick in external demand. The cyclical recovery is projected to peak in 2026, after which growth is anticipated to slow down following the conclusion of the NextGenerationEU program. After achieving growth of 0.7% in 2024, the average annual GDP growth rate is expected to accelerate to 1.3% in 2025 and 1.8% in 2026.
Recently, inflation has risen again above the European Central Bank’s (ECB) target of 2% and is likely to remain at that level throughout 2025. The ECB has continued to ease monetary policy, and it is expected that the target interest rate of 2% will be reached by September 2025. The balance of risks for GDP growth remains tilted to the downside, partly due to the risk of the new US administration imposing tariffs.
Economic Performance Varies Significantly by Country
Spain remains a leader among the larger economies, driven by an influx of tourists, government spending linked to the NextGenerationEU program, and rising employment. The industrial sector is also performing better than in other European countries, partly due to lower energy prices. Most other Southern and Southeastern European countries (Croatia, Bulgaria, Greece, Portugal) have also recorded relatively high growth rates for similar reasons. Similarly, GDP growth is relatively high in Denmark and Norway, driven respectively by rapid expansion of a major pharmaceutical company and increased natural gas production. However, economic activity in other sectors in these countries remains low, as is the case in Sweden and Finland.
Germany stands out negatively compared to other countries, with its GDP stagnating since Q4 2021, remaining close to pre-pandemic levels. While consumption spending finally began to rise in the second half of 2024, investments remain low amid pessimistic business sentiment, exports are declining despite slight increases in external demand, and fiscal policy does not provide the much-needed support. Germany’s problems have a significant negative impact on its close trading partner, Austria, which remains in recession.
Differences in Labor Market Dynamics
EY economists emphasize that labor market trends continue to vary significantly between countries. In Spain, Italy, and Croatia, employment is rapidly increasing, and unemployment is falling from still high levels, driven by rising participation rates, strong economic activity, and significant immigration. Meanwhile, in Germany and many Central and Eastern European countries, employment levels are stable, and unemployment remains very low due to adverse demographic trends. In Central and Eastern Europe, tight labor markets, alongside substantial wage increases in the public sector and minimum wage hikes, keep nominal wage growth above 10%. In the Nordic countries, where labor supply conditions are more favorable, weak economic activity has led to a cyclical slowdown in the labor market, with decreased employment and rising unemployment.
It is expected that differences in economic growth rates among countries will largely persist in 2025, even if the momentum of tourism and employment in Southern Europe weakens slightly, while Germany slowly emerges from stagnation as exports finally rise, consumption continues to grow, and investments cease to decline. On average, Spain’s GDP is projected to grow by 2.8% in 2025, while Germany’s GDP is expected to increase by only 0.5%. Central and Eastern European countries, where growth disappointed in 2024, should see stronger recoveries in 2025, with GDP growth in the range of 2.0% to 3.5%. Growth in investments and exports is expected to accelerate as EU fund absorption (both NextGenerationEU and other EU funds) increases, alongside gradual recovery in Western Europe and easing monetary policy. Economic activity is also set to rise in the Nordic countries, where increasing real incomes and easing monetary policy will finally translate into higher consumption and housing investments.
Nominal wage growth is expected to continue slowing to 3%, as the impact of inflationary shocks from previous years on wages diminishes. In the following years, stronger economic growth should lead to further slight reductions in unemployment, while wage growth is likely to stabilize just below 3%, higher than pre-pandemic levels but in line with an inflation target of 2% amid a structurally tighter labor market. Stable conditions at the eurozone level will mask discrepancies between countries, as employment growth remains strong in Spain and experiences a cyclical recovery in the Nordic countries, while in Germany and Central and Eastern Europe, employment will remain stagnant. Wage growth will still be elevated in Central and Eastern Europe, albeit gradually declining in the coming years.
Inflation Amid Trade Tensions
EY economists predict that inflation will remain at around 2.3% throughout 2025. While core inflation is expected to decrease, reaching 2% by the end of 2025, food and energy prices will rise, keeping overall inflation above 2%. Core inflation should decline as service price inflation ultimately falls due to slower wage growth, even if inflation in core goods is likely to rise as disinflationary processes in industrial goods markets wane and the EU imposes tariffs on selected American products in response to Trump-era tariffs. At the same time, inflation for food, alcohol, and tobacco may remain high at nearly 3% due to previous supply shocks and tax increases, while energy prices should rise slightly due to higher natural gas costs. In 2026, overall and core inflation should stabilize close to 2%.
Inflation levels continue to differ between European countries due to variations in domestic demand, wage growth, energy price regulations, and increases in excise duties on tobacco products. In 2025, inflation is expected to remain highest in Central and Eastern European countries, while Nordic countries and Switzerland should experience the least price pressure. In Central and Eastern Europe, inflation is likely to remain above 3.5% in several countries due to persistent service inflation and high food price inflation. The highest inflation rate is anticipated in Poland, where significant excise duty increases on tobacco and expected hikes in regulated energy prices will further elevate inflation. In this context, central banks in Central and Eastern Europe have slowed or halted interest rate cuts in recent months. EY economists expect that high inflation will hinder more aggressive easing of monetary policy in 2025 as well—central banks in Poland, Romania, and Hungary are set to cut rates by 75 basis points, leaving rates at still elevated levels of at least 5% by year-end. The return to neutral rates of 3.5% to 4% is likely to take several years in both Poland and Romania.
In contrast, a strong Swiss franc and low wage growth will continue to limit price pressures in Switzerland. Suppressed inflation has prompted the Swiss National Bank (SNB) to lower interest rates from 1.75% to 0.5% in 2024. EY economists foresee further cuts to 0% in the first half of 2025.
Trade and Geopolitical Tensions
Trade policy by the new US administration is a key source of risk for economic growth and inflation. Donald Trump has hinted at plans to impose higher tariffs on imports to the USA, which will likely prompt retaliatory actions from other countries. European GDP is expected to suffer compared to the status quo, not only due to direct export limitations resulting from increased prices caused by tariffs and weakened global demand but also due to uncertainty surrounding potential exacerbation of the trade war. EY’s baseline scenario assumes limited tariffs on selected products; however, the risks lean toward a broader range of tariffs. Imposing tariffs on all goods would impose a significant burden on the European economy in the medium term, particularly affecting countries with significant industrial sectors such as Germany, the Czech Republic, and Hungary.
EY economists also highlight that geopolitical tensions continue to pose threats, citing ongoing wars in Ukraine and the Middle East and potential new areas of geopolitical tensions (Panama Canal and Greenland). Escalation of these tensions could heighten uncertainty, lead to price surges in raw materials, further increase transportation costs, and cause turbulence in global trade, which could in turn lead to renewed inflationary pressures and adversely affect global economic activity, especially in Europe, which is more susceptible to global shocks due to its high level of economic openness.
In the short term, economic activity may also be lower due to a prolonged decline in industrial production, delayed recovery in consumption and investment growth. The risks for industrial production prospects are tilted downward, as structural loss of competitiveness among European producers, partly due to higher energy prices and increasing competition from China, could be more serious than current forecasts suggest. Additionally, global uncertainty may negatively affect business and consumer sentiment, delaying economic recovery.
Despite these negative risk factors, economic growth may also turn out stronger than expected. For example, tight labor markets should encourage companies to increase investments in productivity-enhancing technologies and replacements for labor, including automation, robotics, and generative artificial intelligence, which could translate into faster productivity growth.
Source: https://ceo.com.pl/ey-gospodarka-polski-przyspiesza-ale-inwestycje-wciaz-problemem-42181
