Macroeconomic Forecast: New Era of Fiscal Dominance

This year, the Czech economy will post the highest growth for the past three years, despite the unfavourable external conditions related to the implementation of custom duties on exports to the US. However, following this year’s expected growth of the real GDP by 2.1%, Komerční banka’s forecast for 2026 envisages growth declining to 1.6%. The main reason is the current economic slowdown when the second half of this year will be hit by the impact of custom duties imposed on goods exported from the EU to the US, which will have an adverse effect on performance in 2026. “In spite of that, we have raised the growth expected next year by 0.5 p.p. to 1.6%, chiefly thanks to the expected fiscal expansion by the new cabinet,” clarifies Jan Vejmělek, Chief Economist at Komerční banka. But the forecast also expects a fiscal stimulus from virtually the whole euro area, in particular from Germany. “Here, we should see the implementation of the first projects from the approved infrastructure package, and higher defence expenditure should be added to this,” adds Jana Steckerová, Komerční banka’s economist. 

The Czech economic growth will primarily build on household consumption this and next year. There will be no significant drop in employment, although we do expect the rate of unemployment to gradually rise owing to the current slackening of general economic activity and the persisting structural problems in industry. Real wages, and hence also households’ real available income will continue to grow. This year’s growth of investments is primarily attributable to the public sector; in the private sector, they should be more visible only next year, primarily in connection with the fiscal stimulus in Germany and the related recovery of industrial activity, which remains muted this year because of the tariff wars. “On the contrary, in particular civil engineering, where production has risen to the highest level for the past 15 year, is profiting from public contracts,” Martin Gürtler, Komerční banka’s economist, comments on the encouraging data from the construction industry.

Inflation will be slightly above the target this year and slightly below it next year, but still within the CNB’s tolerance zone. Consumer prices will rise, on average, by 2.4% and 1.5% this year and next year respectively. Core inflation will stay increased (+2.7%) this year, mainly because of services and housing costs; the core component should decline closer to the target (2.1%) on average next year thanks to the persisting monetary restrictions and sluggish economy. “Next year, overall inflation will decline to 1.5% on average; among other things, lower energy prices (both the regulated and the unregulated (= market) components of energy prices will be lower) will be helpful in this respect. However, the fiscal stimulus that we expect will mean that core inflation will approach the target only temporarily,” forecasts Martin Gürtler. 

Czech koruna will take time out. “We consider the recent dynamics of the Czech currency’s strengthening to be generally faster than would reflect improvements in the economic fundamentals,” explains Jaromír Gec, Komerční banka’s strategist. Primarily the positive sentiment at global forex markets was koruna’s key driver. Although we expect the US dollar to continue weakening, in the second half of this year the Czech economy’s momentum is slackening, which should subdue the still relatively optimistic market expectations concerning the Czech economy’s growth. “We therefore expect on the whole that before the more expansionary fiscal policy starts to generate a positive effect, which should gradually build up only in 2026, Czech koruna should temporarily interrupt its appreciating trend until early next year,” Jaromír Gec reveals his forecast. 

Fiscal policy relaxation is visible on the horizon. We expect the new cabinet to restate the national budget for next year, the same as happened after the preceding general elections. This will likely necessitate a provisional budget in the first quarter of 2026. We expect the cash deficit of the national budget to deepen to CZK 320 billion next year due to, inter alia, increased infrastructure investments and defence expenditure. “We therefore consider that public finance deficit will rise to 2.8% of the GDP,” notes Jaromír Gec. Following the end of the stopgap we expect the fiscal policy’s visibly expansive working to build up gradually, with a favourable effect on GDP growth, but also on inflation and interest rates. We do not expect the consolidation of public budgets to be restarted in the following years. At the same time this means that the budgetary policy rules may be loosened.

At the end of the day, a more expansive fiscal policy and stronger economic growth will support lending activity next year, despite the tighter financial terms. Demand for mortgage and consumer loans will remain strong, similar to this year’s demand. But primarily the lending stimulus from the business sector should strengthen. “A combination of larger funds from public budgets and private investment will underpin the Czech economy’s growth,” adds Kevin Tran Nguyen, Komerční banka’s economist. The property market continues to be overheated. “The growth of real estate prices should gradually slow down, but will probably stay at relatively high levels,” Kevin Tran Nguyen forecasts. Despite the tighter financial terms, credit risk in banks’ portfolios will increase only slightly.

Macroeconomic forecast

Source: CSO, CNB, Ministry of Labour and Social Affairs, Macrobond, Economic and Strategy Research Komerční banka