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Macroeconomic Forecast Tariffs Bite Off A Chunk Of Growth
The Czech economy is very open and extensively involved in global production chains, and the country therefore cannot evade the adverse impacts on its economic dynamics. Direct exports from the Czech Republic to the US are not so much of a problem; it is indirect imports that are—we as subcontractors contribute to European exports to the US. There is also a strong effect of the extremely high uncertainty channel, which is paralysing investments. “While last year’s second half and this year’s first quarter have surprised us positively, we expect the barriers in external trade and the increased economic uncertainty to begin influencing the Czech GDP’s development from the second quarter. We cannot assume that Donald Trump’s policy will not affect this country,” Jan Vejmělek, Komerční banka’s Chief Economist, indicates the expectations for the rest of this year.
The Czech economy’s growth will stay below its potential for the next two years. Following the real GDP’s growth of 1.0% last year, it will add 1.5% this year thanks to the strong end of the year, but it will only be 1.2% in 2026. “While this year’s growth outlook is not changing in terms of the aggregate number, because the higher data seen so far will compensate for the weaker rest of the year, we have aggressively reduced the outlook for 2026 by one whole percentage point,” Martin Gürtler, Komerční banka’s economist, completes the changes in the growth forecast.
In terms of the structure of growth, household consumption will continue to play the leading part. “Because of the situation in the global economy and in Germany itself, we will not be able to rely on external demand this year,” Jana Steckerová, Komerční banka’s economist, comments on the prospects for our export markets. Consequently, this year Czech industrial production will decline for the third year in a row. Combined with the massive global economic uncertainty, this will send investment activity plummeting. Household consumption will be a stable anchor generating a positive contribution to economic growth this and next year. Although the rate of unemployment will rise slightly, the labour market as a whole will remain tight. “Combined with tamed inflation, this will mean a continued growth in households’ real disposable income,” adds Martin Gürtler.
Inflation will hover slightly above the inflation target this year and slightly below the target next year. On average, consumer prices will grow by 2.2% and 1.8% this and next year respectively. Core inflation will remain increased (+2.4%) this year, chiefly because of services and housing prices; thanks to the persisting monetary restriction and economic downturn, the core inflation should decline under the target next year. Foodstuff and service prices will continue to fuel the growth of prices, while prices of energy and goods will work in the opposite direction. “Since inflation is slightly below its target at the horizon of our forecast and since we still regard the CNB’s interest rates as fairly restrictive, the monetary policy rate should drop to the terminal 3.0% by the end of this year,” Martin Gürtler predicts.
Koruna strengthening postponed. “We consider that aversion to risky assets and the Czech economy’s slowdown due to the rising tariff barriers will not allow the Czech koruna to strengthen appreciably this year,” explains Jaromír Gec, Komerční banka’s strategist. Conversely, supported by the CNB’s persisting restrictive policy the interest differential remains extended, while capital outflow from the US may continue. But probably not even this will suffice to compensate for the negative factors. “We expect on the whole that the koruna may stay above CZK 25/EUR on average until the end of this year,” Jaromír Gec unveils the forex prospects.
Public finance consolidation is slackening. In the coming years, a new exemption from the country’s budgetary rules may apply to additional defence expenditure. We therefore expect a somewhat slower pace of the consolidation than in the preceding forecast. In spite of that we still believe that the Czech Republic will continue to meet the Maastricht criteria for public finance deficit and debt. “The public finance deficit is likely to stay close to last year’s 2.2% of the GDP this year, which would be a much better result that the EU countries’ average. Thus, the condition of the country’s public finance has significantly improved compared with the preceding five years when our economy kept experiencing a series of unprecedented negative shocks,” notes Jaromír Gec. However, in view of the easing trend in fiscal rules in Europe and of the Czech Republic’s still relatively low overall debt we are aware of a medium-term risk that at the end of the day, the country’s rules could be revised towards a more relaxed fiscal policy even more profoundly. The rising probability of a rather significant economic downturn associated with increased tariff barriers in global trade is also tipping the risk towards a deeper deficit in the country’s public finance.
The country’s wilting economy, which is able to stifle households’ and companies’ borrowing appetite, will take the wind out of the sails of the lending impetus, lower interest rates notwithstanding. On the contrary, the mortgage segment may continue to draw support from the recovery of the property market and from deferred demand. This combination will fuel the property market’s strong expansion. “The rapid growth of property prices is likely to constitute a significant inflationary pressure,” warns Kevin Tran Nguyen, Komerční banka’s economist. Hit by the custom duties the business sector will suspend its investment decisions and thus also lending activity. “The weak economy is likely to be felt in the credit default rate increasing somewhat, but it is still very low at present,” adds Kevin Tran Nguyen.
Macroeconomic forecast
| 2024 | 2025 | 2026 | |
|---|---|---|---|
| GDP (real growth, yoy in %) | 1,0 | 1,5 | 1,2 |
| Household consumption (real growth, yoy in %) | 2,0 | 3,9 | 1,7 |
| Fixed investment (real growth, yoy in %) | -1,4 | -4,3 | 0,9 |
| External trade balance (CZK bn) | 227,1 | 192,4 | 176,4 |
| Industrial production (real growth, yoy) | -1,0 | -0,9 | 1,1 |
| Retail sales (real growth, yoy in %) | 4,4 | 2,6 | 1,5 |
| Wages (nominal growth, yoy in %) | 7,1 | 5,0 | 4,1 |
| Unemployment rate (MPSV, in %) | 3,8 | 4,4 | 5,1 |
| Inflation (yoy in %) | 2,4 | 2,2 | 1,8 |
| 3M PRIBOR (average) | 5,0 | 3,5 | 3,3 |
| 2W Repo (average) | 5,1 | 3,5 | 3,0 |
| EUR/CZK (average) | 25,1 | 25,1 | 24,9 |
Jan Vejmělek
Komerční banka’s Chief Economist
tel.: +420 222 008 568
jan_vejmelek@kb.cz