Komerční banka’s economic forecast: Rollercoaster ride

This year, the Czech economy will grow at a rate of 1.9% following last year’s pandemic recession that caused the real GDP to fall by 5.8%. Compared with our preceding forecast, this is a significant downward revision from the originally expected 4.2%. In 2022, the Czech economy is expected to grow by 3.5%. “The pre-pandemic level will be achieved approximately three quarters later, i.e. in the second half of 2022,” Jan Vejmělek, Komerční banka’s Chief Economist, observes on the impact of the changes in forecasts. The shortage of components for production is a global problem and it has resulted in the downward revision of economic growth for the second half of this year in, for example, the US, and also in the euro area. “We firmly believe that this will be only a temporary problem that will subside during next year,” clarifies Jana Steckerová, Komerční banka’s economist.

The developments in the Czech economy resemble a rollercoaster ride. The covid lockdown in spring was replaced with euphoria from the lifting of measures, which turned into something like a headache during the summer because, in the better case, of the dramatic increase in the cost of energy and feedstock for production; in the worse case, sometimes there is nothing to manufacture from. The acute shortage of components, primarily in industry and construction, means that economic growth basically came to a halt during the third quarter.

The prices of virtually everything are surging for reasons on both the supply and demand sides. Because of the pandemic during 2020, the limited production and the reductions of inventories and orders collided with demand, which basically did not weaken despite the pandemic thanks to the extremely easy monetary and fiscal policies. The specificities in the energy and automotive sectors, which are related to the green transition policy, should be added to this. Thus, inflation has staged a comeback. The current growth of consumer prices is the largest since 2008; in the case of core inflation it even is the largest in the history of the time series. “We have raised our forecast of this year’s inflation to 3.6% from the original 2.8%, and it will be even higher next year. We expect to see it at 4.8% on average,” notes Michal Brožka.

In the light of this high inflation the CNB is quickly returning to the normal as regard its interest rates. The September hike of the key repo rate by 75 bp was the largest ever.

This year’s results of public finance will be better than the approved national budget. Komerční banka’s forecast presented in April is gradually coming true, and so its new version contains only a few cosmetic changes. The national budget is heading towards a deficit of CZK 400 billion this year and because of the slower investment activity at the end of this year, the resulting figure may even be slightly smaller. “Although the speed at which the national budget deficit is being deepened increased again in September the result continues to be much better than the Finance Ministry’s plan,” František Táborský, Komerční banka’s strategist, appraises the performance of government finance.

The koruna’s appreciation to the euro will slow down. We consider that the rising market interest rates and the development of the US dollar will continue to be the main factors for the koruna’s direction. “However, these factors will act against each other to a considerable extent. We expect the koruna to strengthen at a slower pace than in the first half of this year. At the end of this year, it will post CZK/EUR 25.10, hitting 24.80 next year,” František Táborský forecasts.

Macroeconomic forecast

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