EU economic forecast: Poland with the highest inflation in the EU in 2023

"Russia's war of aggression against Ukraine continues to negatively affect the EU economy, setting it on a path of lower growth and higher inflation compared to the Spring Forecast. The Summer 2022 (interim) Economic Forecast projects that the EU economy will grow by 2.7% in 2022 and 1.5% in 2023. Growth in the euro area is expected at 2.6% in 2022, moderating to 1.4% in 2023. Annual average inflation is projected to peak at historical highs in 2022, at 7.6% in the euro area and 8.3% in the EU, before easing in 2023 to 4.0% and 4.6%, respectively," EU Commission said in a press release on Thursday.

According to the Commission, "Poland’s economy entered the year on a strong economic footing, with real GDP expanding by 2.5% q-o-q in the first quarter".

"Stock building was the main growth driver, as companies are gradually moving away from just-in-time production due to heightened uncertainty and global supply chain pressures. An outsized increase in equipment investment in the manufacturing sector lifted investment growth to 11.5% q-o-q. Meanwhile, private consumption increased only moderately despite the significant inflow of people fleeing Ukraine, which suggests that elevated inflation and declining consumer confidence are already having an adverse impact on households’ spending decisions," the Commission said.

Furthermore, the report said that "economic growth is set to decelerate throughout the remainder of 2022, under the impact of Russia’s war of aggression against Ukraine, monetary policy tightening, deteriorating economic sentiment and a weaker external environment". "Private consumption is set to continue to be supported by the demand for necessities of displaced persons from Ukraine and ongoing fiscal expansion."

"Nonetheless, consumption growth will be restrained by heightened uncertainty and recent monetary policy tightening, which raises household’s incentives to save and weighs on disposable income, especially given the large share of mortgages with variable interest rates in Poland. Elevated cost-pressures, higher uncertainty and tighter financing conditions are also expected to lead to firms postponing their investment projects, including in the construction sector," we read in the forecast.

The authors of the report also predict that "the collapse in trade with Russia and Ukraine and a decrease in demand from Poland’s main trading partners is set to weigh on export performance in 2022, leading to a negative contribution from net exports to growth in 2022". "However, as global supply chain disruptions gradually ease and economic activity picks up, export growth should recover and lift the trade balance, especially towards the end of 2023."

"Overall, GDP growth is expected to reach 5.2% in 2022, in large part driven by the exceptionally strong first quarter. Quarterly GDP growth rates are expected to remain below their historical averages at least until the second half of 2023. In 2023, despite a pick-up in growth rates, a low carryover is expected to leave the annual GDP growth at 1.5%" - we read.

The European Commission argues in the forecast that "rising commodity prices, booming demand and supply side bottlenecks have all contributed to a steady and marked rise in inflation in recent months". Poland's inflation reached 15.6% in June.

"These strong price dynamics are expected to persist in the remainder of 2022, due to elevated global energy and food prices and ascending core inflation. Core inflation should remain persistently high throughout the forecast horizon as higher energy prices, labour shortages and supply bottlenecks drive price growth for services and industrial goods," EU Commission said.

"Nonetheless, the weakening of growth momentum and a gradual decline in global supply chain pressures and energy prices will likely lead to a decrease in inflation towards the end of the forecast horizon. As a result, after reaching 12.2% in 2022, HICP inflation is projected to decline to 9.0% in 2023," we read in the report.