The World Bank In Poland

COUNTRY CONTEXT

The Polish economy has weathered global and regional external shocks thanks to a well-diversified economic structure, integration into regional value chains, a commitment to macroeconomic stability, a sound financial sector, and domestic labor markets that have supported significant wage growth and private consumption, feeding into long-term poverty reduction and median income growth. The crises have yet weakened the fiscal stance, and the energy crisis resulting from the invasion of Ukraine has led to a sharp increase in inflation which reduced purchasing power of households and has started to weigh down on growth.

The new administration that took office in December 2023 faces steep challenges, notably that of improving the quality of institutions, particularly the rule of law. The Polish economic model is also at a crossroads: it requires boosting productivity through stimulating innovation, decarbonizing the energy sector, tackling rising inequality, and reskilling and upgrading of the labor force in a context of a rapidly aging population. Greater efficiency in public spending and tax expenditures is needed to rebuild fiscal buffers and accommodate spending on health, defense, and renewable energy.

Medium-term economic prospects hinge on achieving the technological and green transitions, advancing inclusion, and addressing labor shortages despite nearly one million refugees from Ukraine easing some pressure. The technological transformation and ambitious European Union (EU) decarbonization objectives, where Poland is lagging other EU Member States, require investment and planning, including ensuring a just transition that contains growing regional disparities, with political uncertainty potentially affecting investments until the end of the electoral cycle in May 2025.

Last Updated: Apr 19, 2024

Strategy

The World Bank Group’s financing to Poland remains highly selective and in support of delivering global and/or regional public goods. Poland has made strides in strengthening its overall economic governance systems over the last three decades with key economic institutions for instance being able to put together a robust package of fiscal and monetary actions in 2020 that limited the GDP contraction caused by the COVID-19 pandemic. Today, the spillover effects from the war in Ukraine require agile economic planning and management to mitigate the impacts from the crisis on growth and public finances, while supporting the vulnerable, including Ukrainian refugees.

However, economic and social institutions to manage key transitions—demographic, green, and digital—need to be developed further on the national and subnational level to achieve sustainable graduation from the International Bank for Reconstruction and Development (IBRD). To boost growth and reverse trends that are slowing down productivity and to further reduce inequality of opportunity in the future, Poland will need to navigate three imminent transitions that require it to simultaneously shift towards a green economy, adopt digital technologies, and adjust to the needs of an aging population.

These shifts will require strong political ownership, institutional coordination, and administrative capacity to direct the enabling reforms at the national and subnational level, including through establishing appropriate financing structures to support the needed investments. Local institutions also must deal with increased pressure from the war in Ukraine. The 12 largest metropolitan areas were estimated to have experienced a huge influx of Ukrainians in the months after the outbreak of the war in Ukraine, stretching the capacity of local housing services, and placing significant pressure on public services like health, education, water/wastewater, and transport.

The World Bank will continue to work together with the Government of Poland, the EU, UN agencies, and other partners on the implementation of flagship initiatives where progress can advance the development agenda on global public goods, such as economic integration of forcibly displaced populations, decarbonization, just transition (out of coal), comprehensive water management, clean air, and sustainable cities.

Last Updated: Apr 19, 2024

Recent Economic Developments

After robust 5.3% real GDP growth in 2022, economic expansion decelerated markedly in 2023, to 0.2%. Private consumption was the main drag contracting due to high inflation, tighter financing conditions, and the unwinding of household support measures. This is despite a robust labor market and double-digit increases in average and minimum wages. External demand contracted as major trade partners' economic situations worsened. Exports significantly slowed in H2 2023. To the upside, firms’ strong financial performance and the electoral cycle bolstered private and public investments.

Inflation peaked at 18.4% year-on-year (YoY) in February 2023, then slowed down, reaching 3.9% YoY in January 2024, due to falling global commodity prices, a stronger zloty, and fewer supply disruptions. Measures like the extension of the zero VAT on essentials and fuel price caps until H1 2024 kept prices lower. The National Bank of Poland started its monetary easing cycle with a 75 basis points (bps) cut in September 2023, ending an early monetary tightening cycle started in October 2021 (665 bps). The zloty’s 10% real appreciation in 2023 mirrored positive government-related risk perceptions.

Untargeted measures to protect households and firms from the energy and food price shocks contributed to the widening of the fiscal deficit to 5.6% of GDP, as did higher debt service costs and the time-lagged impact of the PIT reform.

Extreme poverty rates (national concept) remained slightly above those in 2017, due to lingering impacts of pandemic labor disruptions among vulnerable workers, reductions in the coverage of targeted minimum income programs and in the real value of the Family 500 program, and declining purchasing power amid inflation. The Gini coefficient of inequality continued the upward trajectory visible since 2017.

Economic Outlook

Economic growth is set to accelerate to 3% in 2024 and 3.4% in 2025, fueled by increased private consumption, as declining inflation and ongoing wage growth persist due to a tight labor market and a staged increase of the minimum wage in 2024. Boosts in the universal family transfers from 500 to 800 PLN per month, the expansion of the 14^th month pension, along with investment driven by structural reforms and unlocked EU funds, will support growth, especially in 2025. Net exports’ contribution to growth should turn negative in 2024 as domestic demand fuels imports while EU exports remain weak.

Inflationary pressures are expected during H2 2024 primarily due to the reinstatement of VAT on basic foodstuffs and the phasing out of energy price caps. On an annual average, it should stabilize at around 5% and move closer to the NBP target of 2.5% (+/- 1% band) in the medium term.

Revenue shortfalls (from the tax reforms and exemptions), increased defense and election-related spending, are expected to keep the general government deficit at 5% of GDP in 2024.

In 2024, poverty reduction is expected to resume due to expanded untargeted social programs, a strong labor market, and higher minimum wages. However, socially vulnerable households remain at risk due to long-term reductions in the coverage and adequacy of minimum income programs.

Last Updated: Apr 19, 2024