Macroeconomic Forecast: Held Captive by Geopolitics
The cost shock, in the form of more expensive energy commodities, will slightly squeeze this year’s Czech economic growth and increase inflation prospects for this and next year. Thus, Komerční banka’s updated macroeconomic forecast envisages an economic growth of 2.3% this year and 2.8% next year. Our January forecast expected a growth of 2.7% for both years. “Naturally, the Iran conflict and expensive motor fuels are behind the downward revision for this year. We expect the conflict to be resolved by mid-2026 and the oil prices are already past their peak. Fiscal expansion will be felt this and next year,” Jan Vejmělek, Komerční banka’s Chief Economist, clarifies the key assumptions for the growth forecast.
The expensive energy commodities will have an adverse effect on the performance of the external trade balance. Amounting to almost CZK 210 billion last year, surplus is likely to be ten times smaller this year. Solely imports of expensive energy commodities will cause this dramatic deterioration. Exports should experience a good growth of almost 5% in nominal terms. We do not expect the current supply shock to be comparable with that in 2022 and 2023 in the case of global economy, either. “The fiscal stimulus will support what from the Czech perspective are the key European export destinations,” adds Jana Steckerová, Komerční banka’s economist.
Internal demand will drive this year’s economic growth while external demand’s contribution should be more visible next year. Investment activity surged last year, and this fact will also be reflected in this year’s results despite the current uncertainty. Household consumption will be the key item on which the Czech economy’s growth will rely this and next year. In the labour market, the ongoing economic growth is expected to arrest last year’s trend of rising unemployment; nevertheless, last year’s unemployment also had a major structural feature: we could observe employment decreasing in industry but increasing in the service sector. Developments in wages were rather surprising by their stronger dynamics. In nominal terms, wages grew by 7.2% last year and Komerční banka’s forecast expects 6.4% this year. “Compared with the preceding forecast we have improved wage dynamics by 0.8 pp,” confirms Martin Gürtler, Komerční banka’s chief forecaster.
Inflation will peak in the early months of 2027. Motor fuels constitute the primary channel through which the Iran conflict is being transmitted into consumer prices in the Czech Republic. Consumer price hikes, despite the government’s regulations in this market, have motivated our upward revision of this year’s expected inflation to 2.2% from the original 1.6%. For 2027, Komerční banka’s forecast expects the rate of inflation to average at 2.7%. In the early months of 2027, inflation is expected to peak above 3.5%, but also due to the technical effect of the low comparison base of early 2026. Core inflation will stay close to the upper limit of the tolerance zone for most of 2026 and 2027. “We therefore believe that the CNB will be in no hurry with rate cuts. We have postponed the return to the neutral 3.0% to as late as 2028,” adds Martin Gürtler on the prospects for the CNB’s monetary policy.
The Czech koruna is resisting, but has not yet won. So far, it has been responding rather tepidly to the swelling energy prices. “However, we consider that the pressures for koruna’s weakening can still return. Such pressures would be fuelled not only by the increased uncertainty and the deterioration in the Czech economy’s external balance but also by the narrowing of the interest rate differential due to the ECB’s tightened monetary policy and the stability of the CNB’s rates,” explains Jaromír Gec, Komerční banka’s strategist. “Thus, on the whole, following its initial weakening we expect the koruna rate to stabilise at around approximately CZK/EUR 24.50 until the end of this year,” Jaromír Gec unveils his outlook.
Fiscal discipline subsiding. We expect the national budget’s cash deficit to deepen to CZK 310 billion this year. “In relation to the GDP, our estimates indicate that hand in hand with such deepening the public finance deficit will rise from last year’s 2.1% to 2.8% of the GDP,” Jaromír Gec opines. Following the end of the budget stopgap we expect the fiscal policy’s expansive working to build up gradually, with favourable effects on GDP growth, but also on inflation and interest rates, until the end of this year. We do not expect the consolidation of public budgets to be restarted in the following years. At the same time this means that the country’s budgetary policy rules will likely be loosened. “In the base scenario, we still expect the EU limits to be kept but because of the currently debated amendment to the law on budgetary rules the risk is biased towards even deeper deficits and, hence, faster swelling of the public debt. The risks related to the current energy shock are also working in the same direction,” adds Jaromír Gec.
Geopolitical uncertainty and higher interest rates will cause only a slight slowdown in the growth of lending activity and real estate prices. Despite the higher interest rates, the growth of mortgage and consumer lending will remain strong and will again significantly contribute to the overall growth of lending in the Czech economy. The corporate sector will also contribute a major share. “Although the financial conditions have deteriorated the level alone of the monetary policy rates is no longer the primary obstacle. Investment appetite will draw on the fiscal stimulus and the growth of aggregate demand in the economy,” forecasts Kevin Tran Nguyen, Komerční banka’s economist. Expansion in the property market will continue at a swift pace. “The growth of real estate prices is showing signs of a slowdown, but will nevertheless stay fast and outpace that of households’ income,” Kevin Tran Nguyen opines. In the environment of geopolitical uncertainty, the low level of credit risk, households’ and companies’ solid financial situation and favourable growth prospects offer strong support for financing the Czech economy going forward.
Macroeconomic forecast
| 2025 | 2026 | 2027 | |
|---|---|---|---|
| GDP (real growth, yoy in %) | 2,6 | 2,3 | 2,8 |
| Household consumption (real growth, yoy in %) | 3,0 | 3,7 | 3,0 |
| Fixed investment (real growth, yoy in %) | 2,6 | 4,4 | 2,5 |
| External trade balance (CZK bn) | 209,8 | 26,1 | 118,5 |
| Industrial production (real growth, yoy) | 2,1 | 2,0 | 3,3 |
| Retail sales (real growth, yoy in %) | 3,3 | 3,5 | 2,9 |
| Wages (nominal growth, yoy in %) | 7,2 | 6,4 | 6,0 |
| Unemployment rate (MPSV, in %) | 4,4 | 4,8 | 4,5 |
| Inflation (yoy in %) | 2,5 | 2,2 | 2,7 |
| 3M PRIBOR (average) | 3,6 | 3,5 | 3,6 |
| 2W Repo (average) | 3,6 | 3,5 | 3,5 |
| CZK/EUR (average) | 24,7 | 24,4 | 24,2 |