Poland's Economic Outlook for 2025: Moderate Growth, Increased Defense Spending, and Fiscal Challenges

Poland's economy is expected to grow moderately in 2025, with GDP growth projected between 2.8% and 3.5%. The IMF, OECD, and ING Bank predict continued expansion, driven by domestic demand and government investments. However, a significant increase in defense spending—rising to 4.7% of GDP—poses fiscal challenges, with Poland seeking EU exemptions for military expenditures. The government is also considering reallocating EU recovery funds to strengthen defense and economic resilience. Meanwhile, monetary policy is expected to remain tight, with possible interest rate cuts in late 2025, depending on inflation trends.

Economic Growth and Projections

Poland's economy is anticipated to experience moderate growth in 2025. The International Monetary Fund (IMF) projects a GDP growth rate of 3.5% for that year, with a slight deceleration to 3.3% in 2026. Similarly, the Organisation for Economic Co-operation and Development (OECD) forecasts a 3.4% growth in 2025, tapering to 3.0% in 2026. Analysts from ING Bank Śląski are optimistic, predicting an acceleration in economic growth to 3.2% or higher in 2025, driven by a resurgence in domestic demand.

Government Initiatives and Investment Plans

In response to regional security concerns, particularly following Russia's invasion of Ukraine, Poland has significantly increased its defense spending. In 2024, defense expenditure reached 4.1% of GDP, with plans to escalate this to 4.7% in 2025. President Andrzej Duda has proposed enshrining a minimum defense spending of 4% of GDP into the constitution. Additionally, Prime Minister Donald Tusk announced that all adult men would undergo military training to bolster national defense capabilities.

To support these defense initiatives, Poland is considering reallocating up to 30 billion zlotys (approximately $7.6 billion) from European Union funds designated for the Recovery and Resilience Plan towards defense and economic resilience. This reallocation underscores the government's commitment to strengthening the defense sector amidst geopolitical tensions.

Fiscal Policy and Monetary Considerations

The substantial increase in defense spending has implications for Poland's fiscal policy. The country faces a fiscal deficit of 5.7%, leading to its inclusion in the EU's excessive deficit procedure. In light of this, Polish Finance Minister Andrzej Domański has advocated for the European Union to exempt defense expenditures from fiscal penalties, arguing that such spending is crucial for continental security.

On the monetary front, the IMF's representative in Poland, Geoff Gottlieb, indicated that monetary policy easing might commence in the latter half of 2025. He emphasized that while current interest rates are restrictive and above the neutral rate, any rate cuts should be gradual due to persistent inflation risks. As of now, the National Bank of Poland has maintained interest rates at 5.75% since October 2023.

Conclusion

In summary, Poland's economic outlook for 2025 reflects moderate growth supported by robust government investments, particularly in defense. However, the escalation in defense spending presents challenges in fiscal management, prompting discussions on potential exemptions within EU fiscal frameworks. Monetary policy is expected to remain cautious, with considerations for gradual easing contingent upon inflation trends.

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