Komerční banka’s Macroeconomic Forecast: Engine Running, Fuel Prices Climbing
Internal demand is keeping the economy afloat. This year, household consumption should grow by 2.7% and fixed investments by 6.1%. This estimate of consumption growth is lower than Komerční banka expected in summer, because the weaker dynamics of wages and higher inflation are constraining the growth of real income. On the other hand, investment activity remains strong; but following the unusually dynamic period, it will gradually slow down during the following quarters, also in relation to the more restrictive effect of market interest rates.
“The Czech economy has not come to a standstill; it has only geared down. Households continue to increase their consumption and businesses are investing, but industry is still coping with problems and more expensive energy is driving costs up. Thus, the engine is running, but the fuel prices have climbed,” Jan Vejmělek, Komerční banka’s Chief Economist, summarises the gist of the forecast.
Despite more expensive oil and the geopolitical uncertainty, the world’s economy remains resilient. The US is benefiting from the fiscal stimulus, strong household consumption, and high corporate capital expenditure, in particular on data centres and AI. The EU’s funds, AI investments, households’ large savings, and German fiscal expansion are supporting the euro area. European industry remains a weakness but the gradual recovery of global demand and the relatively favourable leading indicators presage some improvement.
“The world economy’s resilience also has its downside. It makes it easier for businesses to pass through higher costs into prices and extends the period of higher inflation. We therefore consider that the Fed and ECB will continue to tighten their monetary policy. For the Czech economy, this implies a combination of a still good external demand with more expensive energy and interest rates higher for a longer time,” says Jana Steckerová, Komerční banka’s economist.
Growth prospects have deteriorated compared with our July forecast. The Czech GDP’s estimated growth declined from 2.1% to 1.7% for this year and from 2.6% to 2.3% for next year. Weaker development in the first half of the year and the continuing Middle East conflict’s adverse consequences are behind the downward revision. Growth is expected to gradually return to the rate near the Czech economy’s potential.
“The downward revision does not suggest that our economy is plummeting into recession. Although its short-term dynamics is weaker than we have expected, the leading indicators continue to be relatively favourable. We therefore expect a gradual acceleration of growth in the coming quarters,” says Martin Gürtler, Komerční banka’s chief forecaster.
The tense labour market supports households’ income, but this year wages will rise at a slower rate than we have expected up to now. We have reduced our forecast of the increase in nominal wages from 7.1% to 6.2% for this year. In 2027, we expect them to rise by 6.0%. This year, the unemployment rate will be 5.0% and it will slightly decline to 4.9% next year. However, higher inflation will slice off a larger part of the increase in households’ purchasing power, which will hinder their consumption.
Inflation will accelerate. This year, it will be a low 2.1% on average, but it will rise to 3.0% in 2027. The main causes will include more expensive electricity, gas and heat, higher prices of motor fuels, and renewed food price hikes. Core inflation will continue to hover around 3% at the beginning of next year and will start to gradually decline only then. According to our forecast, the stronger inflationary pressures will make the CNB hike the 2W repo rate to 4% in November. It is expected to stay at this level until the end of 2027, and we expect the first cut in February 2028. However, because of the persisting inflationary risks, further hikes of the Czech rates cannot be ruled out.
“Inflation will peak at the beginning of next year. In February, the year-on-year growth in consumer prices may climb up to almost 4%. Thereafter, a strong basis effect will be felt and inflation will gradually decline over the year. It is the risk of a higher inflation, increased for a longer stretch of time, which is the reason why we expect the CNB’s November rate hike and the subsequent longer continuation of the rates at 4%,” says Martin Gürtler, Komerční banka’s chief forecaster.
The current negative sentiment and the CNB will cause a temporary setback for the Czech koruna. According to Komerční banka’s forecast, there will be no positive impetuses for the Czech currency until the end of this year. An appreciating US dollar and the gradual shrinking of the differential between the market’s koruna and euro interest rates will primarily work against the koruna’s appreciation.
“Nevertheless, the Czech koruna is set to return to gradual appreciation next year. It will be supported by a stabilised rate differential, improved sentiment, and the Czech economy’s growth higher than that in the euro area. On the whole, we expect the rate at CZK 24.40/EUR at the end of this year and around CZK 24/EUR in a year’s time,” Jaromír Gec, Komerční banka’s strategist, estimates the forex outlook.
Fiscal expansion is swelling. This year’s total deficit in public finance is likely to deepen from last year’s 2.1% to 2.8% of the GDP. The fiscal policy will operate even more expansively next year due to the increase in the budget’s deficit to the recently approved CZK 386 billion, i.e. 3.5% of the GDP at the level of total public finance. In our opinion, a further relaxation of the budgetary policy next year will support economic activity for a limited time only: the economy is not suffering from any unused production capacities and the proportion of capital expenditure in the budget is not increasing.
“However, at the same time, the related stronger inflationary pressures may help to keep the market interest rates and yields of government bonds at a relatively higher level for a longer time. We do not expect any significant public finance consolidation in the coming years either. The public debt is therefore set to continue to rise gradually, exceeding 50% of the GDP by the end of this decade,” forecasts Jaromír Gec.
Lending activity in the Czech economy continues to maintain its brisk rate of growth, but is gradually encountering the limit of tighter financial terms and conditions. In the household sector, the mortgage market’s cooling is expected to continue due to the higher level of interest rates becoming more manifest. This should further support the decline in the rate at which property prices are rising, but their downturn appears to be unlikely at the moment. The surge in corporate borrowing reflects the renewed increase in the level of Czech businesses’ debt and investment appetite against the backdrop of the Czech economy’s resilient growth. A combination of higher interest rates and the shrinking room for increasing indebtedness is expected to hamper growth in lending next year.
“Despite the higher interest rates, the financial cycle continues to be significantly expansive. The tighter conditions at the financial market have appreciably influenced only the mortgage market so far, but they are expected to gradually also impede borrowing in the corporate sector, in which investment appetite nevertheless remains solid, including in connection with certain structural changes in the economy,” comments Kevin Tran Nguyen, Komerční banka’s economist.
“Although the Czech economy is growing at a slower rate than we expected in summer, there is no return to stagnation. Internal demand remains sound and investment activity strong, while industry is expected to recover gradually. The comeback of higher inflation will be the main complication for next year. It will slice off a part of the increase in households’ purchasing power while making the CNB keep interest rates higher for a longer time. Thus, the Czech economy can look forward to continuing growth, but in less comfortable settings,” concludes Jan Vejmělek, Komerční banka’s Chief Economist.
Macroeconomic forecast
| 2025 | 2026 | 2027 | |
|---|---|---|---|
| GDP (real growth, yoy in %) | 2.7 | 1.7 | 2.3 |
| Household consumption (real growth, yoy in %) | 2.6 | 2.7 | 2.4 |
| Fixed investment (real growth, yoy in %) | 3.3 | 6.1 | 2.3 |
| External trade balance (CZK bn) | 200.2 | 96.3 | 161.3 |
| Industrial production (real growth, yoy) | 2.2 | 1.9 | 2.2 |
| Retail sales (real growth, yoy in %) | 3.3 | 4.2 | 2.5 |
| Wages (nominal growth, yoy in %) | 6.6 | 6.2 | 6.0 |
| Unemployment rate (MPSV, in %) | 4.4 | 5.0 | 4.9 |
| Inflation (yoy in %) | 2.5 | 2.1 | 3.0 |
| 3M PRIBOR (average) | 3.6 | 3.7 | 4.1 |
| 2W Repo (average) | 3.6 | 3.7 | 4.0 |
| CZK/EUR (average) | 24.7 | 24.3 | 24.2 |