Macroeconomic Forecast Inflation on target, economy limping along

The Czech economy’s growth is still lagging behind its potential. Komerční banka’s updated forecast shows that following the real GDP’s growth of 0.9% last year, it will climb to around 1.5% this year. “Compared with the October edition, there has thus been basically no change in the general tenor of our forecast for the real economy. Nevertheless, in the light of the ongoing unfavourable situation we have had to downgrade the outlook for Czech industry for this year; unfortunately, it will decline for the third year in a row,” Jan Vejmělek, Komerční banka’s Chief Economist comments on the current forecast. The inflation outlook for this year has been revised slightly upwards to 2.2% from the original 1.8%. “The risks that we warned about have started to materialise: foodstuffs are experiencing higher price hikes and the strong recovery in the real estate market is likely to escalate housing costs,” adds Jan Vejmělek. 

The Czech economy will grow faster than those of Germany and of the euro area as a whole this year. While the Czech GDP will rise by 1.5% this year, in Germany it will increase by less than half this rate while the euro area will add 1.1%. “In respect of Germany, we see the risks in deteriorated development; the early general elections scheduled for late February constitute a big uncertainty,” warns Jana Steckerová, Komerční banka’s economist, adding: “Another global risk is Donald Trump’s protectionist policy.” Thus, solely internal demand will drive this country’s economy this year. Household consumption will clearly be the most important contributor, followed by government’s consumption and investment. The persistently unfavourable situation in industry will result in swelling inventories. Industrial production declining for the third year in a row and the ongoing structural changes in the economy will cause the rate of unemployment to rise somewhat. “Its nature should be more of a frictional unemployment where dismissed employees will transfer to more promising sectors. However, given the gravity of the situation in industry, a rather significant increase in unemployment cannot be ruled out,” notes Martin Gürtler, Komerční banka’s economist. We will therefore still see a quite robust growth of real wages in the market, and this will be the key driver of rising consumer demand. 

Inflation will hover just above the inflation target this year. From the year-on-year perspective, the end of last year saw a local peak of 3.0%, but inflation will fall immediately in the first month of this year. For the whole of this year, Komerční banka’s forecast expects average inflation at 2.2%. “It is important that the rate of inflation to which monetary policy responds and which primarily the CNB monitors is basically on target this and next year in our forecast. Thus, following the December pause, the CNB should cut rates again, this time to as low as 3% by mid-2025,” Martin Gürtler expects. 

The Czech koruna is facing a rather hard time. “We expect that the slow start of the country’s economy, the narrowing interest differential and strong dollar will also defer the Czech currency’s more significant strengthening to the second half of this year. In particular the development at global forex markets and the gradual strengthening of the Czech economy’s growth, which should visibly surpass the euro area, are expected to support the koruna thereafter,” explains Jaromír Gec, Komerční banka’s strategist. This year, the emerging markets’ currencies should in general benefit from risk aversion subsiding somewhat combined with the United States’ slower economic growth and declining interest rates, which we believe will be accompanied by a moderate reduction in long dollar positions. “We expect on the whole that the koruna will gradually appreciate to 25 CZK/EUR, climbing to just below this rate by the end of the third quarter of 2025,” Jaromír Gec reveals the forex outlook. 

The public finance deficit is safely contracting to less than 3%. The national budget deficit should shrink from last year’s CZK 271.4 billion to around CZK 240 billion this year. “In relation to the GDP, the public finance deficit is likely to decline to 2.3% this year from last year’s 2.7%. This would be a much better result than the EU countries’ average. Compared with the preceding five years when the Czech economy continuously faced a series of unprecedented negative shocks, the condition of the country’s public finance has therefore improved significantly,” Jaromír Gec opines. According to our estimates, the effects of the fiscal policy on the economy will be roughly neutral this year following last year’s restriction caused by the consolidation package. 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.

The lending impetus should inject some energy into the economy again this year. Lower interest rates and households’ and companies’ stronger confidence will help to increase their credit demand. The lending impetus will also continue to support primarily the retail segment. The real estate and mortgage markets will continue to expand strongly. “The quick growth of real estate prices will help to keep core inflation above 2%,” opines Kevin Tran Nguyen, Komerční banka’s economist. Persisting uncertainties in the country’s economy may constrain growth in corporate investment. “But despite the tight monetary policy, the credit default level stays low, evidencing companies’ robust financial situation,” adds Kevin Tran Nguyen.

Macroeconomic forecast

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

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