Komerční banka's Macroeconomic Forecast: The Czech Economy Will Probably Slip Back Into A Recession
Prague, 30 July 2012 – The Czech economy entered a recession in the final quarter of last year, which then even deepened in the first months of 2012. Fiscal measures in most EU countries, hampering foreign demand for Czech goods, were the main reasons behind the economic decline in the Czech Republic. The government’s consolidation efforts were reflected in weaker domestic demand as well. In the second quarter, we expect a mild economic rebound. However, this will probably prove only temporary due to one-off factors. We put a high probability on the Czech economy’s slipping back into a recession again in the second half of the year.
The second quarter is expected to offset the unpredicted and significant slump recorded in the first three months of the year. We see several one-off factors, like lower tax collection on certain products (mostly cigarettes) and strong frosts in February, as behind the pronounced economic decline of 0.8% quarter-on-quarter at the beginning of the year. In the second quarter, we look for real growth in GDP of 0.6% over the first quarter.
The outlook for the second half of 2012 and 2013 is being dragged by unfavourable external conditions. The economy of the euro area is to contract 0.5% according to our forecasts and will only stay flat in 2013. Therefore, the Czech economy is expected to print a decline of 0.5% as well, and we look for moderate recovery and a growth of 0.6% in 2013.
Net exports will remain the driver of the Czech economy, as we look for their contribution of 2.3 percentage points to GDP dynamics. External trade performance recorded a substantial improvement in the last quarter of 2011 and the first half of 2012. As for the whole year, we expect the external trade surplus to reach a record CZK 300bn. In 2013, the surplus will improve only marginally.
On the other hand, we expect a further contraction in domestic demand due to ongoing reductions in public spending, household consumption and investment activity. Household expenditures are expected to continue to decline as households’ purchasing power is being impeded by additional fiscal measures (effective since the beginning of the year), a higher rate of inflation, weak growth in nominal wages and a rising unemployment rate. An economic recession would be reflected in an advance in the rate of unemployment, from last December’s 8.6% to 9.2% at the end of 2012. Unfortunately, this trend will persist even in 2013 (toward 9.7%), as the expected economic recovery will not have enough momentum to drive unemployment down.
Inflation is past its peak, but it will remain above 3% in the coming months. The year-on-year dynamics of consumer prices topped 3.8% in March, and in the second quarter, inflationary pressures eased to June’s 3.5%. The rate of inflation is being driven above the Czech National Bank’s 2% target mainly by cost pressures due to higher indirect taxes, regulated prices and a rise in fuel and food prices.
With regards to our previous forecast, we have revised the inflation outlook toward higher levels as we now look for an average rate of inflation of 3.6% in 2012 and 2.7% in 2013. Dramatically higher prices of agricultural commodities on global markets and the forecasts of a weak harvest this year are the main reasons behind this revision. In addition, in recent weeks we have seen a renewed rise in oil prices. Also, changes in indirect taxation, both in the domestic economy and abroad, will be of great importance. The contribution of the primary effects of tax hikes amounts to 1.2 percentage points in 2012 inflation, and in 2013, the contribution is expected to reach 1.0 percentage points due to higher VAT and excise duty on cigarettes.
At its June meeting, the Czech National Bank cut its key rate 25bp to 0.50%. We see the CNB keeping its rate unchanged at least until end-2013. Another cut in the rate could be delivered if there is a significant economic deterioration in the euro area or if other anti-inflationary factors emerge.
In the final months of the year, we see very limited potential for any appreciation of the crown. The Czech economy is expected to struggle with a recession in the second half of the year, and the contribution of net exports to GDP dynamics will gradually diminish. In terms of interest rates, the Czech crown will stay unattractive for foreign portfolio investors. The outlook for the external environment does not look positive, either. The EMU debt crisis is reflected in weakening economic performance. Over the one-year horizon, the Czech crown may get stronger, as we expect the economy to embark on a growth trajectory.
We identify the main risks toward the macroeconomic forecast as stemming from abroad, mainly a deeper and longer recession in the euro area than currently expected and expansion and escalation of the debt crisis.
|GDP (real growth, yoy in %)
|Household consumption (real growth, yoy in %)
|Fixed investment (real growth, yoy in %)
|External trade (CZK bn)
|Industrial production (real growth, yoy in %)
|Retail sales (real growth, yoy in %)
|Wages (nominal growth, yoy in %)
|Unemployment rate (MPSV*, in %)
|Inflation (yoy in %)
|Adjusted inflation (yoy in %)
|Food prices (yoy in %)
|Fuel prices (yoy in %)
|Regulated prices and taxes (yoy in %)
|3M PRIBOR (average)
|2W Repo (average)
Source: Economic & Strategy Research, Komerční banka
* Ministry of Labour and Social Affairs methodology
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