Macroeconomic Forcast - A sleepy start for the economy

In terms of performance, the worst is over for the Czech economy; it will do better this year following last year’s slump. However, this growth will be very gradual, and visible only in the second half of the year; internal demand, primarily driven by revived household consumption, will propel the growth. This will be helped by, in particular, real wages rising thanks to the persisting tension in the labour market on the one hand and much lower inflation on the other hand. From the double-digit levels during the past two years, inflation will return to the tolerance zone although it will probably stay above the 2% target. The CNB launched a series of rate cuts in December 2023. Nominal rates will decline significantly this year, but in real terms they will continue to be restrictive anyway.

24. 1. 2024 15:00

The Czech economy will already grow this year. Following a drop of 0.4% in real GDP expected for last year, Komerční banka’s current forecast envisages a growth of 0.8%. This implies that the Czech Republic will be the last EU member state to reach its pre-pandemic end-2019 level at the end of this year. “We have halved this year’s growth prospects compared with our October forecast, since mainly the first months of this year will continue to be weak,” Jan Vejmělek, Komerční banka’s Chief Economist, introduces the context. The restrictive effect of monetary policy is persisting for the time being and the Czech cabinet’s consolidation package will impact on both households and businesses at the beginning of this year. Nor is the situation of our key trading partner encouraging. According to the latest data, Germany evaded technical recession by a hair’s breadth in the second half of last year. “Our forecast suggests that the German economy will pick up by an insignificant 0.2% this year,” clarifies Jana Steckerová, a KB economist.

Primarily internal demand will drive this year’s moderate growth of the Czech economy. Both the private and public sectors’ investment activity was already apparent last year and overall capital expenditure in the form of gross fixed capital formation had climbed to the pre-pandemic level by mid-2023. The pace at which investments increase will be somewhat faster this year because this growth should be helped by the gradual decline in the financing costs thanks to decreasing interest rates. “However, household consumption will be the key factor from the perspective of this year’s growth,” emphasises Martin Gürtler, Komerční banka’s macroeconomic forecaster. Household consumption continues to linger almost 10% below the end-2019 level. “But last year’s closing months already brought initial indications that the decline in household consumption was ending; for example, when looking at retail sales or sales in services,” adds Martin Gürtler. KB’s forecast expects real household consumption to rise by 2.7% this year, mainly driven by the growth in real wages; we have seen this growth in q-o-q dynamics since Q2 2023. The reason is that the Czech economy’s low performance so far is basically not being felt in the labour market; we expect an only cosmetic increase in unemployment. The rate at which nominal wages are rising will therefore attack 7% this year, but against the backdrop of much lower inflation.

Annual inflation will plunge right from the beginning of 2024. KB’s forecast expects it to even fall below 3%, which will return it to the CNB’s tolerance zone. But it will stay above the 2% target. Following 10.7% last year, inflation will probably stand at 2.7% on average this year. “Due to the recovery of internal demand, however, core inflation will remain increased throughout this year and we expect it to stand at 3.2% on average,” warns Martin Gürtler.

The CNB will continue to cut rates this year. Nevertheless, it will probably remain very cautious at the beginning and we expect it to cut the rates by 0.25 pp at its February meeting as it did at its December 2023 meeting. “Mainly the uncertainty surrounding the extent of the January repricing of goods and services, which will set the level of this year’s inflation for a large part, will continue to generate strong impacts,” Martin Gürtler notes the main reason for the CNB Board’s vigilant approach, adding: “Because of the Czech economy’s persisting weakness the CNB should accelerate its rate cutting once the January inflation has been published, i.e. exactly one week from the February meeting.” We expect the basic repo rate to stand at 4% towards the end of this year. However, our forecast expects it to reach its equilibrium level of 3% as late as the end of next year because core inflation is subsiding only very slowly.

A turnaround in the koruna’s weakening trend is within sight. The Czech economy’s unconvincing performance plus the narrowed interest rate differential do not, in our opinion, play in favour of the koruna strengthening over the short term. In addition, this year’s recovery in the Czech economy will largely be driven by household consumption. Higher imports will therefore offset increasing exports to a considerable extent in the balance of external trade. “Following an initial weakening we nevertheless expect the second half of this year to see the koruna slightly strengthening to the euro once again in the wake of a revival in the global sentiment to emerging markets’ currencies combined with the gradual recuperation of the Czech economy’s fundamentals,” Jaromír Gec, a KB strategist, unveils the forex prospects.

The government’s debt is now swelling at a slower pace. Last year’s CZK 288.5 billion deficit of the national budget was slightly better than had been planned. “This year, the consolidation package combined with the end of certain extraordinary measures and the recovery of the Czech economy should help reduce the public finance deficit to visibly below 3% GDP, which should also boost the attraction of Czech government bonds,” Jaromír Gec opines. As the result, the total public debt will continue to grow, but only slowly in relation to the nominal GDP.

Lending activity stronger this year following last year’s dull. Economic recovery, in particular investment thanks to lower interest rates, will deliver the impetus. The mortgage market’s accelerating recovery will also result in a renewed growth of real estate prices. “The lending impetus will support the economy more significantly this year,” believes Kevin Tran Nguyen, a KB economist. Despite the negative economic development the loan market remains resilient. “The loan default rate remains very low and so reflects the good financial situation of both households and businesses,” adds Kevin Tran Nguyen.

Macroeconomic forecast

GDP (real growth, yoy in %) 2.4-0.40.8
Household consumption (real growth, yoy in %) -0.8-3.12.7
Fixed investment (real growth, yoy in %)
External trade balance (CZK bn) -204.8143.6145.0
Industrial production (real growth, yoy) 2.6-1.20.5
Retail sales (real growth, yoy in %) -3.3-4.33.4
Wages (nominal growth, yoy in %)
Unemployment rate (MPSV, in %)
Inflation (yoy in %)
3M PRIBOR (average)
2W Repo (average)
EUR/CZK (average) 24.624.024.8
Source: CSO, CNB, Ministry of Labour and Social Affairs, Macrobond, Economic and Strategic Research Komerční banka 

Jan Vejmělek
Komerční banka’s Chief Economist
+420 222 008 568