Macroeconomic forecast Fasting over: growth ahead

The first months of this year have confirmed the recovery of internal demand. Consumer sentiment has been positively influenced by inflation returning to the central bank’s 2% target; together with the persistently tense labour market, this has helped real wages to start to rise again. Investment activity continues with good dynamics and net exports are benefiting from the global supply and production chains’ smoother working, which is mainly visible in automotive production. The CNB will continue to cut rates cautiously. Real interest rates stay restrictive, and inflation will therefore oscillate around 2% this year, but may slightly decline below this level on average next year.

24. 4. 2024 13:00

While the Czech economy experienced a slight downturn for FY 2023, it is visibly growing this year. Komerční banka’s upward revised growth forecast expects real GDP to rise by 1.4% this year following its decline by 0.2% last year. “The improved growth prospects imply that we will achieve the pre-pandemic end-2019 economic level as early as this current second quarter,” notes Jan Vejmělek, Komerční banka’s Chief Economist. Retreating inflation on the one hand and subsiding uncertainty surrounding the impacts of the government’s consolidation package, effective since the beginning of this year, on the other hand means that internal demand is recovering again, as shown by the monthly statistics of retail sales or revenues in the service sector. “Thanks to this, the Czech economy is able to break away from the non-growth of the German economy that will, in our opinion, only remain stable this year,” notes Jana Steckerová, KB’s economist, on our key trade partner’s situation.

Household consumption expenditure will be the main driver of this year’s economic growth. It dropped by a significant 3.1% last year, primarily due to the slump in real wages. Since the labour market remains tense – last year’s economic downturn resulted in only a cosmetic increase in the rate of unemployment – once the inflation subsided, wages started to rise again also in real terms. From the QoQ perspective, this has been under way since the second quarter of last year; they have probably been rising also on a yoy basis since the beginning of this year. Consumer sentiment, which climbed to the highest value for the last two and a half years in March, also reveals a willingness to spend more on consumption. For 2024, KB’s forecast therefore expects household consumption expenditure to grow by 2.7%. “Even so, we will reach the pre-pandemic level only at the beginning of 2026,” expects Martin Gürtler, KB’s macroeconomic forecaster. Last year’s growth of investment, already very good at 4.3%, will accelerate to 4.5% this year. Lower interest rates and thus lower financing costs will support the private sector’s willingness to invest. Furthermore, EU funds will underpin the public and private sectors’ investment appetite. 

Inflation has returned to its target as consumer prices rose by 2.0% yoy in February and March. We will oscillate around the inflation target basically until the end of this year. The forecast expects this year’s average inflation at 2.1%. “We estimate this year’s core inflation still above 2%; but next year, thanks to the current restrictive effects of the monetary policy, it will drop on average below the targeted 2% level, which will also be true for overall inflation,” adds Martin Gürtler.

The CNB will probably continue in only gradual rate cutting. The central bankers have so far been explaining their caution by the weaker Czech koruna and the quick growth of service prices, which is still around 5%. “We therefore expect the three forthcoming CNB Board meetings to cut the CNB’s rates again by 0.5 pp,” notes Martin Gürtler. The CNB Board also says that it wants to keep the rates higher than was customary earlier. The ECB and Fed are thinking along the same lines. “As the result, we have increased our estimate of the level to which the Czech rates will decline. While originally, we expected their terminal level at 3%, now we expect it at 3.5%,” adds Martin Gürtler. KB’s forecast expects this level to be reached as early as the end of this year.

The Czech koruna may already be past its weakening. “The Czech economy’s recovery combined with the CNB’s higher terminal rate should support a renewed slight strengthening of the Czech koruna to the euro for the rest of this year,” Jaromír Gec, KB’s strategist, reveals the forex prospects. On the other hand, the development of forex markets’ global sentiment, favouring the US dollar, will not support the emerging markets’ currencies, the same as in the last few months. “At the same time, according to our expectations the green banknotes should keep their strong positions throughout this year, thereby preventing the Czech koruna from strengthening even more,” adds Jaromír Gec.

Public finance is gradually being consolidated. Although this year’s national budget has not been developing too well according to the interim data for the first quarter, we still consider that for the full year, it will end with a deficit of CZK 250 billion, i.e. approximately in line with the Finance Ministry’s plan. Next year, the deficit should shrink to CZK 235 billion, but the election year 2025 and the buffer against the statutory limits created by the consolidation package are deflecting the risk more towards a somewhat deeper deficit. “Relative to the GDP, after four years, the negative balance of public finance should drop visibly below 3% of GDP this year and come close to 2% of GDP next year,” Jaromír Gec opines. In absolute terms, the total public debt will continue to grow, but only gradually in relation to the nominal GDP.

This year, the lending activity will offer a stronger impetus for the Czech economy to grow. The lower rates and the renewed confidence on the part of households and businesses will help to increase capital expenditure. This should, in turn, also help to enliven the mortgage market. “The recovery of the mortgage market and the meeting of deferred demand, combined with only limited new construction in the preceding years, will pressure for real estate prices to rise,” notes Kevin Tran Nguyen, KB’s economist. Payment discipline has remained robust despite the unfavourable economic development. “The NPL rate close to the historical minimums proves households’ and companies’ good financial situation,” adds Kevin Tran Nguyen.

Macroeconomic forecast

GDP (real growth, yoy in %) -
Household consumption (real growth, yoy in %) -
Fixed investment (real growth, yoy in %)
External trade balance (CZK bn) 124.4208.4188.4
Industrial production (real growth, yoy) -
Retail sales (real growth, yoy in %) -
Wages (nominal growth, yoy in %)
Unemployment rate (MPSV, in %)
Inflation (yoy in %)
3M PRIBOR (average)
2W Repo (average)
EUR/CZK (average)
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