Macroeconomic Forecast – Economy reluctant to take off

Activity in the Czech economy remains muffled. Komerční banka’s updated forecast shows this year’s real growth at 0.8%, and in 2025 at 1.5%. Compared with the summer forecast from late July, we have increased the outlook for this year by 0.1 pp, in particular thanks to the economy’s better performance in the second quarter. “However, the recovery that we had expected did not materialise during the summer months, and we are afraid that the rest of this year will also be marked by continuously faltering performance, most notably in the case of industry, which will also affect the outlook for 2025,” explains Jan Vejmělek, Komerční banka’s Chief Economist. The growth expected for 2025 has therefore been revised downward by 0.4 pp. “In the market, our outlook for 2025 places us among the rather pessimistic,” adds Jan Vejmělek. 

We cannot expect much help from abroad. Our external trade’s contribution to this year’s economic growth will be positive at 1.0 pp. However, the main reason on the exports side will be the export of the automotive sector’s completed products under earlier contracts and this will no longer have a positive effect next year. “In a situation where the German economy is stumbling on the brink of recession and its industry is suffering because of expensive energy and generally weak demand, we cannot expect the Czech situation to be fundamentally better,” explains Jana Steckerová, Komerční banka’s economist. Net exports’ contribution to GDP growth will be negative in 2025. 

Thus, largely internal demand will drive economic growth in 2025. The growth of fixed investment should increase from less than 1% this year to 2.3% next year. Help should come from lower interest rates, and thus cheaper financing, a slight growth of industrial production, a higher level of optimism, and the public sector’s investment activity supported by EU funds. Household consumption will slightly increase from this year’s expected 1.7% to 2.3%, the continuing growth of real wages helping in this respect. “However, in the light of the development so far, we have revised the expected growth of nominal wages downward for this and next year while revising the rate of inflation slightly upward,” Martin Gürtler, Komerční banka’s economist, adds to the wage forecast. According to Komerční banka’s forecast, real wages will therefore reach the pre-pandemic level by around mid-2026, and basically the same is true for real household consumption. 

Inflation is staying within the central bank’s tolerance zone. It has been hovering above the 2% target for the most part of this year and at its end, it will even approach 3%. It will stand at 2.5% on average but next year, it should fall to 1.8% on average because of the weaker growth of regulated prices due to the lower market prices of energy and also the declining motor fuel prices. Food prices and core inflation will increase by more than 2% in 2025. The current and expected development of inflation will make it possible for the CNB to continue to cut rates at a pace of 25 bp at each Board meeting to the final 3.0% in May 2025. “Compared with the preceding forecast we now expect the CNB’s rates to decline more distinctly during this cycle. Primarily the Czech economy’s faltering performance will be pushing the rates down,” explains Martin Gürtler. 

The Czech koruna may perform well again next year. “We expect that increased nervousness in the markets and the slow start of the country’s economy will also defer the Czech currency’s more significant strengthening to next year. The development in the global forex markets and the gradual renewal of the Czech economy’s growth, which should visibly surpass the euro area, are expected to support the koruna next year,” explains Jaromír Gec, Komerční banka’s strategist. Next year, the emerging markets’ currencies, including the Czech koruna, should in general benefit from risk aversion subsiding combined with the United States’ economic growth and interest rates declining, which we believe will be accompanied by a significant capital outflow from the US dollar. “We expect on the whole that the Czech koruna will gradually appreciate to 25 CZK/EUR, climbing to just below this rate by the end of the first quarter of 2025,” Jaromír Gec reveals the forex outlook. 

The budget deficit will shrink again next year. According to our estimates, the additional flood-related expenditure will inflate this year’s deficit in the national budget to CZK 270 billion. Although a deficit increase of CZK 30 billion to CZK 282 billion has been approved, the budget-amending law contains the upper limit of the flood damage estimate, and we therefore believe that the deficit does not have to be utilised in full. Next year, the cash balance of the national budget should contract to minus CZK 240 billion. “In relation to the GDP, we expect the public finance deficit to shrink to 2.5% this year and to around 2% in 2025. Thus, public finance should end up with a much better balance than the EU’s average in both of these years,” Jaromír Gec opines. We expect the overall public debt to slightly grow in relation to the nominal GDP in the coming years, but to gradually stabilise. The reason is that the applicable legislation makes the continuation of public finance consolidation mandatory after the next parliamentary elections as well. 

Despite the slight recovery in lending, the economy remains relatively weak. Next year, the lending impetus should strengthen and support the economy some more thanks to the further interest rate cuts and businesses’ renewed confidence. The real estate and mortgage markets have quickly rebounded from the earlier slowdown and already are recovering fast. “The accelerating growth of real estate prices constitutes a risk to maintaining low inflation,” warns Kevin Tran Nguyen, Komerční banka’s economist. Nevertheless, the tight monetary policy has not yet triggered any wave of credit defaults. “We can find small cracks in payment discipline but it continues to be extremely robust in general,” adds Kevin Tran Nguyen.

Macroeconomic forecast

Source: CSO, CNB, Ministry of Labour and Social Affairs, Macrobond, Economic and Strategy Research Komerční banka

Jan Vejmělek
Komerční banka’s Chief Economist
+420 222 008 568
jan_vejmelek@kb.cz