Executive Summary

Poland recovered quickly from the COVID-19 pandemic, but economic growth is stalling following Russia’s war of aggression against Ukraine. Inflation has soared against the backdrop of high global energy and food prices and domestic labour market pressures (Figure 1). While Poland’s energy supply remains reliant on coal and use of gas is limited, imports of both Russian coal and gas have been replaced and overall trade links with Russia and Belarus are relatively small. Inflation has been rising in the course of 2022 largely driven by higher energy prices, but also reflecting domestic factors, with consumer price inflation up 17.2% in January.

The labour market enjoyed a strong recovery from the COVID-19 pandemic. With skill shortages and strong wage growth already prior to the pandemic, labour market tightness has increased markedly. The employment and unemployment rates have regained pre-pandemic levels and have now posted their best performances in the past three decades.

Poland has successfully managed a large inflow of refugees. Around one and a half million refugees are living in Poland, mostly women with children, following Russia’s war against Ukraine. A substantial amount of both public and private resources has been mobilised and the refugees are well-supported. Many have integrated into the labour market with some 60% working already, although often taking up temporary and low skilled jobs. In contrast, only around one-third of Ukrainian children attend local classes, the rest most likely following Ukrainian curricula on-line. The uncertainty about the duration of the conflict complicates the appropriate policy response. Nevertheless, the experience of OECD countries has shown that early interventions have large payoffs in terms of integration.

The economy is expected to remain weak over the first half of 2023 due to high energy prices, weak domestic demand and high uncertainty. Economic growth is expected to slow to 0.9% this year before it recovers to 2.4% in 2024. Inflation is anticipated to peak in early 2023 and fall to 3.5% at the end of 2024, still above the central bank’s target. After a small increase, the unemployment rate should stabilise at 3.8% in 2024. Consumption and investment growth should recover in 2024, but the high level of energy prices is likely to lead to a permanent loss of output (Table 1).

The downturn would be deeper in case of an escalation of Russia’s war against Ukraine or further disruptions to energy supply. A more sustained increase in underlying prices could hamper the recovery and lead to higher interest rates. Another downside risk is the impact of tighter global financial conditions. While new COVID-19 cases remain limited so far, the arrival of a more virulent and harmful coronavirus variant remains a risk.

Both monetary and fiscal policies should ensure that higher inflation does not become entrenched. Monetary policy has tightened considerably since October 2021, with the key policy interest rate raised to 6.75% by September 2022. Given the sustained rise in both headline and core inflation in 2022, there are risks that this becomes entrenched in higher domestic inflation. The central bank should continue to ensure that currently elevated inflation expectations do not become entrenched and stand ready to increase interest rates further if necessary.

Fiscal policy continues to support the economy in managing higher energy prices. Following comprehensive pandemic-related packages in 2020-21, substantial policy support is being provided to manage the current cost of living crisis. In 2022, households and businesses benefitted from a temporary lowering of VAT taxes on energy and food, as well as energy allowances. This year, electricity and gas price caps and zero VAT rate on food are in place. Temporary policy support softening the blow of the energy crisis should continue as needed. There is scope to improve targeting of any future supports to avoid adding to inflationary pressures.

Long-term fiscal pressures need to be addressed. A structural budget deficit has opened up and spending pressures from population ageing, healthcare and increased defence spending weigh on long-term fiscal sustainability, although the public debt-to-GDP ratio remains at around 50%. The low replacement rate envisaged for the public pension system could lead to additional fiscal pressures. To this end, working lives should be extended, including by aligning gradually male and female statutory retirement ages and increasing the pension age in line with life expectancy gains in good health.

Broadening the revenue base and improving spending efficiency would help improve fiscal sustainability. Reduced VAT rates and exceptions can be streamlined further and property taxation increased. Both the healthcare system and infrastructure are receiving considerable new public financing, so ensuring efficient spending will be key.

The government is making frequent use of off-budgetary funds and special vehicles to fund temporary support programmes. These funds are part of the general government sector but are not included in the state budget that is at the centre of the fiscal policy debate and approved by Parliament. Strengthening the budgetary framework by reviewing the fiscal rules in the context of European Union (EU) governance reforms and establishing a fiscal council could help maintain fiscal credibility and support better and more transparent management of public finances.

Digitalisation offers new growth opportunities but requires adequate skills. Prior to the pandemic, Poland made rapid economic progress, with living standards reaching around 80% of the OECD average. This was largely thanks to labour productivity gains, which averaged 3% per year from 2010 to 2020. The Polish economy has benefited significantly from inward investment and strong participation in global value chains. It is increasingly shifting towards higher valued-added activities and digitalisation provides valuable opportunities to advance productivity convergence.

Further digitalising the economy can help unleash the entrepreneurial potential of Polish businesses at home and in global markets. This requires the government to take a comprehensive approach across several policy areas. Adoption of digital technologies is relatively low among firms, particularly small to medium-sized enterprises (SMEs), and could be facilitated through expanded and proactive consultancy and technical support. Managerial skills, key to implementing digitalisation in firms, are often lacking. Information and communications technology (ICT) innovation has been growing and should be supported further. Lower regulatory barriers in services could spur more competition and innovation. Digital skills, essential to ensuring an inclusive digital transition, can be improved, particularly among older adults (Figure 2). The authorities should focus on addressing skills gaps among the working age population, while further education can be made more practical and flexible. Targeted awareness campaigns and scholarships could encourage more women in ICT.

In an ageing society and in the current context of a very tight labour market, increasing the skills of workers and better integration of vulnerable groups into the labour market are key. Encouraging longer working lives, facilitating migration and removing barriers to young parents working would all help draw more people into the workforce. Expansion of childcare capacities is under way and should enable more women to participate in the labour market. The authorities are incentivising pensioners to work, which is welcome.

Poland has made progress in transitioning to net zero emissions by 2050, but the rate of decarbonisation needs to accelerate significantly. With improvements in industrial energy efficiency and continued expansion of services, energy demand and economic growth have decoupled since 2010. Nevertheless, the carbon intensity of the economy remains high – Poland remains the fifth most carbon intensive economy in the OECD- and people continue to suffer from poor local air quality (Figure 3).

Poland remains heavily reliant on coal. The long-term strategy, Energy Policy of Poland to 2040, adopted in 2021, provides welcome policy direction for the energy sector. Gas was to play a major role in the green transition, with a gradual build-up of renewables and nuclear. Given the recent developments, the authorities are reviewing the strategy, adding energy security as a key objective. The revised policy should continue to accelerate the development of renewables, diversify technologies and improve energy efficiency, while minimising the increased reliance on coal in the near term.

Setting out a clear long-term path for carbon prices would provide more clarity to households and businesses. Over time, price signals should be strengthened and the regulatory framework improved to foster a faster deployment of renewables. Investments in the electricity grid should be expedited and scaled up. Stepping up efforts to save energy in the housing sector would help to decrease air pollution, carbon emissions and energy poverty. Planned vehicle taxation reforms should be brought forward and reflect carbon content and environmental impact.

A just energy transition requires supporting the most affected workers and regions. Poland’s hard coal mines, which employ the bulk of the miners, are scheduled to close by 2049. A social contract agreed in 2021 is welcome, even though greater emphasis should be put on re-skilling. Such an agreement is also needed for workers in lignite coal mines, with complementary policies provided for the wider coal value chain. Given the improved state of the labour market compared to earlier transitions, the social costs of this transition are likely to be lower than in the past.


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