Macroeconomic forecast making progress...but at a snail's pace

Following last year’s economic stagnation, the Czech economy will perform a bit better this year but a visible recovery will only come with 2025. Komerční banka’s current forecast expects the real GDP to rise by 0.7% this year, accelerating to 1.9% next year. The forecast is based on revised data of the national accounts, which the CSO released at the end of June. In particular, the revisions of the past few years and quarters are significant rather than the rendition—only slightly more accurate in quantitative terms—of the 1990 to 2020 statistics. “Unlike our previous forecast at the end of April it appears that the Czech Republic has not been gathering speed in recent quarters, rather the opposite. The quarter-on-quarter growth dynamics has been weakening since the last quarter of 2023,” Jan Vejmělek, Komerční banka’s Chief Economist, clarifies the main reason for the downward revision of this year’s expected growth.

The country has been above the pre-pandemic level for more than two years but unable to rebound from it. The more accurate historical data show that real production reached the end-2019 level as early as the first months of 2022. As late as three months ago, the original data suggested that the country, the last in the EU, had not risen above the pre-pandemic level. “Qualitatively, the picture has improved, but quantitatively no fundamental change has taken place. Our economy has not rebounded from the pre-pandemic level over the past two years,” Jan Vejmělek assesses the revised data. In a situation of higher energy prices, structural changes spawned by the transition to more sustainable production, and geopolitical tensions, the Czech economy’s industrial nature is the problem. “In the light of German industry’s huge difficulties it’s no wonder that Czech producers are not faring well either,” adds Jana Steckerová, Komerční banka’s economist. In real terms, the country’s industrial production will decline roughly the same as last year, i.e. by up to 1%.

Household consumption will be the key driver of this year’s economic growth. Despite the Czech economy’s only anaemic growth so far, the labour market will stay tense. In addition, following the revision of national accounts it seems that real wages plunged deeper than productivity last year. Real wages therefore have some room to grow in the coming quarters without generating inflationary pressures. “Wage growth is set to be the main driver of household consumption as the key factor of the Czech economy’s growth this year,” emphasises Martin Gürtler, Komerční banka’s macroeconomic forecaster. However, from the perspective of potential growth and keeping the economy competitive, investment activity must be stronger. This year, this activity continues to suffer from the restrictive monetary policy and the overall economic uncertainty. Komerční banka forecasts that investment will decline by 1.7% this year. The easing of the monetary restrictions and the return of interest rates to the neutral level with the initial months of 2025 should help in this respect. Also thanks to this, investment activity will rise to 2.4% next year.

Inflation hit the target in mid-2024, although recent months have been relatively volatile, primarily because of food prices. The development of core inflation is consistent with the inflation target. The monetary policy’s restrictive working to date will mean that following this year’s average inflation of 2.3%, KB’s forecast envisages an average inflation of 1.7% for 2025, i.e. below the target. Thus, the CNB will continue to cut its key rate. “Central bankers are emphasising that the time when they were cutting interest rates at 50-point steps is over. We expect that every upcoming CNB Board meeting will cut the rate by 25bp to 3.50% over the first quarter of 2025,” adds Martin Gürtler.

The Czech koruna is looking forward to better times. “The weakening of the koruna against the euro since around the beginning of June is probably coming to an end. We expect the gradual recovery of the economy, together with a slowdown in the pace of domestic monetary policy easing and a higher CNB terminal rate, to favour the koruna’s appreciation by the end of the year,” Jaromír Gec, Komerční banka’s strategist, reveals the rate outlook. Emerging market currencies should also generally benefit from the start of interest rate cutting cycle in the US this year, which we believe will be accompanied by significant capital outflows from the US dollar. “In our view, the koruna could return to below EURCZK 25 this year and continue to strengthen next year,” adds Jaromír Gec.

Public finance is being consolidated gradually. Although this year’s national budget has not been evolving too favourably, judging by the data continuously reported during the first half of the year we still expect the full-year national budget to end up in a CZK 250 billion deficit, i.e. approximately in line with the Finance Ministry’s plan. Next year, the deficit should decline to CZK 235 billion, but general elections and the related political cycle are causing the risk to be biased towards a somewhat deeper deficit. “Relative to the GDP, the negative balance of public finance should be within sight of 2% this and next year, which would be the best result since 2019,” notes Jaromír Gec. We consider that total public debt to the nominal GDP will slightly increase in the coming years, but will gradually stabilise. The reason is that the applicable legislation requires public finance consolidation to be continued also after next general elections.

Lending activity will continue to support the economy’s slight growth this year and the lending impetus will strengthen next year. Declining interest rates and households’ and companies’ confidence should help to whet investment appetite. Higher mortgage activity should help to set the property market in motion. “Strong demand underpinned by consummating deferred demand, combined with limited construction are pressuring for growth in real estate prices,” adds Kevin Tran Nguyen, Komerční banka’s economist. Despite the tight monetary policy, payment discipline remains robust. “Companies’ and households’ favourable financial situation is borne out by the delinquency rate staying at very low levels,” Kevin Tran Nguyen views the situation in the banking sector.

Macroeconomic forecast

	2023	2024	2025
GDP (real growth, yoy in %)	0.0	0.7	1.9
Household consumption (real growth, yoy in %)	-2.9	2.0	4.2
Fixed investment (real growth, yoy in %)	2.7	-1.7	2.4
External trade balance (CZK bn)	123.4	182.9	122.1
Industrial production (real growth, yoy)	-0.8	-0.7	1.8
Retail sales (real growth, yoy in %)	-4.4	4.4	3.7
Wages (nominal growth, yoy in %)	8.0	7.4	6.2
Unemployment rate (MPSV, in %)	3.6	3.8	3.8
Inflation (yoy in %)	10.8	2.3	1.7
3M PRIBOR (average)	7.1	5.2	3.8
2W Repo (average)	7.0	5.1	3.5
EUR/CZK (average)	24.0	25.1	24.8

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