Economic news

• GROWTH: Poland’s economy expanded by 3.4% y/y in the second quarter, broadly in line with expectations (forecasted 3.5%) and only slightly faster than the 3.2% in previous reading. Quarterly growth momentum, at 0.8%, suggests just a moderate recovery, with services underpinning activity while industry and construction remain weak. We still expect full-year GDP growth near 4% (with the likelihood tilted toward the upside), though this recent print underscores downside risks, particularly if investment and exports falter in the second half. More on the trends and risks can be found here.
• INFLATION: Headline CPI inflation fell to 3.1% y/y in July, down from 4.1% y/y in June, bringing the index back within the National Bank of Poland’s target range of 2.5% ± 1pp. The disinflation was driven mainly by goods, with price growth slowing to 1.9% (from 3.2% last month), while services continued to rise at a steady pace of 6.2% y/y, virtually unchanged from the previous reading. Within the inflation structure, notable increases were seen in housing-related costs (water, sewage, and waste disposal), which lifted core inflation to around 3.3-3.4% y/y. With inflation expected to remain within the NBP’s target band, we maintain our scenario of 25bp rate cut in September.
• BUDGET DEFICIT: Poland’s budget deficit hit PLN 156.7bn by July (54.3% of plan, up from PLN 119.7bn in June), with the 12-month gap nearing the full-year ceiling of PLN 289bn. While July’s spending surge was driven partly by one-off debt redemptions, the sharper concern is weakening tax revenues, which tighten fiscal space and raise the risk of a budget revision.
• BALANCE OF PAYMENTS: The national balance-of-payments data for June brought a pleasant surprise: the country posted a EUR 651m surplus, defying expectations of a deficit (consensus: -EUR 1.1bn). Stronger-than-forecast exports and a rare contraction in imports (helped by cheaper oil and a weak dollar) drove the result. Still, trade figures show Poland running a EUR 2.4bn goods deficit in the first half of 2025, as import growth outpaced exports.
• MINISTRY OF FINANCE: Poland’s finance ministry is drafting plans for a new bank levy from 2026, while warning that President Nawrocki’s flagship tax plan of raising the PIT allowance to PLN  140,000 and expanding exemptions for families would blow a roughly PLN30bn hole in the budget, mostly benefiting higher earners. At the same time, households are turning to sovereign debt: retail investors bought PLN 8.2bn worth of government bonds in July, below the 2022 peak but still a sign of rising appetite as deposit rates sink.
• EU FUNDS: Poland has already committed almost half of its EU Cohesion Funds for 2021-27, signing contracts worth PLN 194.1bn, 47.2% of the available allocation.

Rising Budget Deficit Amid Weakening Tax Revenues

In July, the state budget deficit reached a hefty PLN 37 billion, pushing the rolling 12-month shortfall to PLN 285 billion, almost exactly the amount forecast for the entire 2025 fiscal year (PLN 289 billion). This leaves the Finance Ministry scope for only about PLN 130 billion of additional deficit before the year-end, broadly the same as was accumulated in the final five months of last year. The headline number looks large, but it is worth recalling that deficits tend to be highly backloaded, with the bulk of the gap usually materialising in November and December. Even so, the ministry’s room for manoeuvre has narrowed sharply. Whereas in June one could still argue that a mid-year budget revision might be avoided, July’s figures have made that view harder to sustain.

What happened? The main surprise came on the spending side. Expenditure surged to PLN 86.6 billion in July—32% higher than a year earlier and PLN 23 billion above the monthly average in the first half of 2025. The spike was driven primarily by the redemption of PLN 16 billion of National Development Bank (henceforth, Polish abbreviation, BGK) bonds, originally issued at the height of the pandemic to fund the Covid-19 Countermeasure Fund. It was the second such operation this year, following the March repayment of PLN 19 billion in Polish Development Fund (PFR) bonds tied to the Financial Shield scheme. These transactions had been signalled in advance and make financial sense: refinancing through the state budget is cheaper than rolling over obligations via BGK or PFR. They are thus best seen as technical adjustments, not symptoms of fiscal slippage.

Deficit of central budget, 12-month rolling sum, PLN bn

Source: Ministry of Finance, Pekao Research

The revenue picture, however, is less reassuring. Almost all major tax categories undershot expectations. VAT revenue in July was only 1% higher than a year ago - down sharply from +20% in May and well below the pace of nominal consumption growth. Excise revenues fell by 1% yoy. Personal income tax (PIT) flows remain too distorted by recent changes in local government financing to be informative. The one bright spot was corporate income tax (CIT), which delivered a respectable PLN 4 billion. Overall, though, the pattern is negative: indirect tax revenues are losing momentum, while direct taxes, though improving, are not expanding quickly enough to cover swelling spending needs.

In sum, executing this year’s budget remains possible, but the Finance Ministry’s fiscal space has shrunk markedly, raising the likelihood that a budget bill amendment will be required. That prospect is likely to weigh on Polish sovereign bond yields in the months ahead.

Financial market update

The WIG20 slipped back below the 3,000 mark last week, returning to its familiar consolidation zone of 2,900–3,000 points. On the FX side, the zloty traded steadily with EUR/PLN around 4.25 and USD/PLN near 3.64–3.66, while markets watched developments in U.S.–Ukraine–Russia talks, as any breakthrough could strengthen CEE currencies. Polish government bond yields remained in a sideways trend, with the 10Y benchmark hovering near 5.35%. This week’s focus turns to Thursday’s GUS releases on wages, employment, industrial and construction output, and PPI, which may guide expectations ahead of September’s MPC meeting.