MNI INTERVIEW: Polish Growth Faces Long-Term Price Challenges

Polish businesses are losing international competitiveness due to high labour and energy costs, with uncertainty over domestic tax rises and sticky services inflation adding to challenges which could slow the country’s currently robust growth in the longer-term, the chief economist of one of Poland’s largest employers’ groups told MNI.

Despite a slowdown in the pace of pay increases, cross-sectional data shows wages have risen by around 10% year-on-year for the last three years, Mariusz Zielonka of the Lewiathan confederation said, with labour costs now exceeding a record 14% of total operational costs.

“The government increased the minimum wage for 2026 in accordance with the Ministry of Finance’s inflation projection for next year. In this it acted properly. But when you look at the data from 2023 and 2024, then we observe an increase in the minimum wage by 19% and 21%, respectively, for which there was no economic justification. It’s not related to productivity.”

TAX HIKES

Most employers surveyed by Lewiathan cited legal uncertainty - notably the government’s proposed bank tax and corporate income tax hikes intended to come in from January - as leading sources of concern.

Poland also has one of the highest energy prices per megawatt hour in Europe. “That creates problems for Polish industry, and in fact high energy consumers have lowered production as a result,” Zielonka said.

Industrial production increased for six months from the start of the year, but U.S. tariffs are likely to prompt six months of decline, though Zielonka expects the year to still see some growth overall.

Poland’s overall economy - to which industry contributes some 20% of total output – has remained resilient, with GDP expected to grow at around 3% per year over the medium term. Yet a significant uptick in research and development investment will be necessary to maintain momentum over a longer horizon, Zielonka said.

“We will have to change the attitude towards spending the money for invention, including in the public sector. European and state budget funds come with strict spending rules, which leaves no room for being creative or taking risks.”

Poland spends 5% of GDP on its military, which could create additional value if the money is directed towards the country’s defence industry, Zielonka said, but he doubted whether this would occur.

“Probably the speed at which the money will be spent on modernisation will mean it isn’t used properly.”

BUDGET DEFICIT

Lewiathan members also worry about the budget deficit, which the government has said is likely to reach 6.5% of GDP next year. That puts the 2028 target of 3% out of reach without major spending cuts. But 2027 is an election year and Poland’s debt-to-GDP ratio is five percentage points below the constitutional maximum of 60%.

“We estimate that 80-90% of state expenditures are fixed. It’s therefore very convenient for the government to justify the debt and deficit by saying we are spending 5% of GDP on the modernisation of the military. That is not causing high deficits, but rather essential spending like the healthcare system, social spending, the military and higher education is,” Zielonka said.

“For the government, cutting such spending could cost them the next election, and so they are acting like the previous government, including by introducing new social spending measures which they claim will be funded by new taxation, but are unlikely to be.”

The National Bank of Poland cut its policy rate by 25 basis points to 4.5% this week, citing improvements in the price outlook despite headline inflation holding steady at 2.9% for a second successive month, and with core inflation hovering around 3.0%

Analysts were split on a hold or a cut before Wednesday’s decision, but the Monetary Policy Council may ultimately have eased because the gap between the NBP and European Central Bank policy rates was too great, with negative impacts for Polish industry, Zielonka said.  (See MNI INTERVIEW: Polish Data Underplays Price Pressures-Tyrowicz)

Another 25bp cut would “not be impossible” this year, he added, with Poland still feeling the lagged effect of monetary policy tightness from six months ago.

Yet price growth will remain elevated, with the gap between producer price inflation, at 1.5%, and services sector inflation, currently 6%, becoming “really, really substantial,” Zielonka said, before inflation converges to target in 2028.