The European Central Bank (EBC) has lowered interest rates and, according to expectations, the Federal Reserve (FED) will do the same next week. In Poland, however, the rate cuts will likely be postponed. However, the short-term risk of inflation increase created by the proposed Polish budget for 2025 obscures other threats. The budget scenario leaves the Polish government without much fiscal maneuvering room in the event of a potential economic shock after 2025.
- According to Allianz Trade forecasts, economic growth in Poland should remain solid (2024: +3%, 2025: +3.8%), driven by domestic demand stimulated by an expansionary fiscal policy.
- The reasons for the higher-than-anticipated deficit of the Polish budget for 2025 include social expenditures, especially in the budgetary sphere, and defense expenditures – the highest in NATO relative to GDP (from 3.3% in 2023, and an estimated 4.2% in 2024, to 4.7% of GDP planned for 2025).
- In the short term, the Polish budget proposal poses an inflation risk and is likely to delay interest rate cuts until the second quarter of 2025.
- The Polish budget proposal for 2025 raises questions about fiscal consolidation, which carries a risk that is underestimated by decision-makers and investors.
- Poland has a relatively short maturity profile of public debt (with government bonds of an average maturity of over 8% of GDP in 2024-2025, compared to the emerging markets average of 4.4%)
- Poland’s interest (debt) to income ratio is about 5%
- This scenario (the proposed budget – postponing fiscal consolidation) leaves the government without much fiscal maneuvering room in the event of a potential economic shock after 2025
- We expect the government to begin consolidating its budget starting from 2026, thereby stabilizing the relation of public debt to GDP at around 56%.
- In a scenario assuming a lack of fiscal consolidation, public debt will continue to grow and exceed 60% by 2027
The economic growth in Poland is expected to remain solid in the coming quarters after a surprisingly strong recovery in the first half of the year, which was driven by domestic demand resulting from the expansionary fiscal policy, according to the analysis by Allianz Trade.
Government expenditures have become a key growth engine in recent quarters, growing nearly +11% YoY in the first half of the year. Meanwhile, the contribution of net exports to GDP growth was negative in the second quarter, reflecting the persistent weakness of Poland’s main export markets, particularly Germany.
In the future, we expect the dynamic of domestic expenditure in Poland to be maintained, and the growth of investments to accelerate as the Polish government intends to spend all previously frozen EU funds in the next two years.
Overall, Allianz Trade has raised its full-year forecasts for Poland’s real GDP growth to +3% in 2024 and +3.8% in 2025.
However, the Polish budget proposal for 2025 in the opinion of Allianz Trade questions fiscal consolidation, carrying a medium-term fiscal risk. Therefore, the government will likely have to commit to a deficit reduction path. In this context, it is important to note that Poland’s public debt maturity profile is relatively short, at over 8% of GDP in 2024-2025, compared to the emerging markets average of 4.4%, and the interest to income ratio stands at about 5%.
In the short term, Poland’s budget proposal creates an inflationary risk and will likely defer interest rate cuts until the second quarter of 2025. This risk is driven by rising food and energy prices and the proposed increases in child benefits, pensions and public-sector wages. Core inflation increased from a recent low of 2% YoY in March 2024 to 4.3% in August 2024, leading Allianz Trade to raise its annual inflation forecasts to 3.8% for 2024 and 4.5% for 2025.
Source: https://ceo.com.pl/polski-budzet-na-2025-r-zwieksza-wydatki-i-ryzyko-inflacyjne-odsuwajac-obnizki-stop-procentowych-dlugoterminowe-ryzyko-fiskalne-rosnie-66986
