Poles anxious as cost-of-living crisis creeps nearer to home

As winter approaches in the eastern EU member state of Poland, Poles worry about the impact of galloping prices, mainly driven by rising energy bills.

“It’s very tough for us at the moment,” says Malgorzata, the co-owner of the Bajbuk bookshop in Warsaw’s relatively affluent Saska Kepa district.

Its other co-owner, Katarzyna, says prices in the bookstore have gone up 30%-40% in the last six months.

“This is due to higher energy bills and paper costs, and people are much more wary of buying,” she says. “We don’t have fixed retail prices in Poland like they do in Germany, so we have to pass the costs on to customers,” she says.

With 17.2% inflation, rising interest rates and fiscal and current account deficits, Poland’s €650 billion ($655 billion) economy could easily drift into recession, analysts warn.

The central bank’s inflation outlook foresees more price growth – fueled by three- to four-fold rises in energy bills – until a peak of around 20% year-on-year in February.

Energy caps

Prime Minister Mateusz Morawiecki unveiled a government plan to cap rises in energy prices in September.

The caps on electricity bills will be earmarked for “vulnerable consumers” starting Dec. 1 until the end of 2023.

If annual consumption per household does not exceed 2,000 kilowatt-hours, energy will be set at a guaranteed price, a saving of 150 Polish zlotys (€32) per month, Morawiecki said.

In early October, the government introduced a price cap on electricity to protect small businesses, public service entities and households.

The maximum price of electricity for "vulnerable consumers" and micro-, small- and medium-sized enterprises is 785 zloty (€150) per megawatt-hour. For households, the price cap is set at 699 zloty (€120) per MWh.

The government aims to raise 13.5 billion zlotys (€2.9 billion) from a windfall tax to fund the cap.

The EU’s plans for implementing retail gas price caps at the EU level are supported by Germany, Austria, Hungary and the Netherlands, which argue that wholesale price caps could cause gas demand to rise and leave countries with a supply shortfall on global markets.

A broader cap system is advocated by Belgium, Greece, Poland and Italy, which want the system to include gas imports.

The EU price cap will also possibly include joint purchases of gas supplies and automatic solidarity rules to meet shortages.

Difficult domestic decisions

The Polish government faces an election at the latest in 11 months and has been talking about spending decisions, which – critics allege -- will likely help the ruling Law and Justice (PiS) party’s electoral base.

The Polish government’s loose fiscal policy, analysts say, has a pro-inflationary element and could cancel out the impact of rising interest rates, leaving Poles facing higher mortgages and rising prices.

Since coming to power in 2015, the PiS has introduced various social transfer policies, its flagship being "500+," which gives 500 zlotys (€110) per month to families with two or more children.

“My rent is going up 20% on Jan. 1, 2023, which will take away about half of the 500+ I get for having two kids,” says Klaudyna, a newly unemployed 39-year-old divorcee with 9-year-old twins to support. “It’s tough at the moment,” she says.

“The situation in Poland is very difficult now, for me. Prices, for example at Lidl (supermarket), have gone up hugely. Not speaking about rent and bills, for example, electricity bills from 70 zlotys (€15.50) to 100 zlotys (€22). Also, my apartment rent is going up from 2,500 zlotys (€520) to 3,000 zlotys (€630)," she says.

"That is of course for me a murderous cost. And to get out of this situation, on my earnings, which are 6,000-7,000 zlotys (€1,280-€1,320), a month net, I will have to look for a cheaper apartment to live with some dignity in Poland.”

Macro issues have big impact

On the macro-scale, rising borrowing costs mean higher interest rates.

At the macro-level, there are fears this will be difficult to finance. The yield on Poland’s benchmark 10-year bonds rose last week to over 9% for the first time in two decades.

Analysts from Alior Bank said this is being driven in part by fears Poland will not receive EU funding due to a row over the rule of law, as well as concerns over public spending.

Warsaw’s WIG20 stock index is down 38% this year and the zloty has weakened 4% against the euro and 17% to the dollar.

Poverty and rising prices

Those on lower wages, who spend the biggest proportion of their income on food and utility bills, are the worst affected.

Research by Polish economists Michal Brzezinski, Michal Myck and Mateusz Najsztub indicates that Poland has one of the highest rates of inequality in the EU.

“We have had very regressive tax and transfer regimes. There is much lower redistribution than in Western countries,” Brzezinski says

“Social transfers were changed a bit with the 500+ scheme, but not much. Another reason is the underlying inequality of workers’ productivity. Some work in foreign firms, but a large group of low productivity, 10%, don't, for example in agriculture," he adds.

In 2021, 1.6 million people lived below the subsistence minimum (extreme poverty) in Poland, according to Ryszard Szarfenberg from the Polish Committee of the European Anti-Poverty Network.

Relative poverty – according to the limit of 50% of the average expenditure of all households – affects 4.6 million people.

Meanwhile, 246,000 seniors live below the subsistence minimum and are the group that is increasingly applying for food aid.

Strategic energy plans

Poland has shifted quickly to diversify its energy sources away from Russian supplies, opening a gas pipeline from Norway two months ago and building liquefied natural gas (LNG) terminals in northern Poland to take gas from Qatar and the US, among others.

Natural gas is planned to provide a lower-emissions phase from coal to renewable energy, but with Russian energy giant Gazprom threatening to keep restricting exports to Europe, natural gas is no longer an affordable alternative for Polish markets and the Polish government is trying to put together a viable plan B, according to a recent report by Ernst & Young (EY) Poland.

“In the conditions of economic recession and growing energy poverty, there is a risk that the energy transition may be slower or even stops altogether,” the report says.

Meanwhile, the report, commissioned by the Polish Electricity Association (PKEE), estimates that transforming Poland’s coal sector could cost €135 billion by 2030, making coal an expensive option also.