Komerční banka’s economic forecast: Lockdown version 2.0

The second wave of the pandemic and the imposition again of restrictive measures on (not only) the economic life in the Czech Republic have sharply truncated the promising recovery that we saw in the Czech economy during the third quarter. We are afraid that these tight restrictions will also distress us in November and will have their economic impacts. Thus, the economy will slide into recessions again in the last quarter of this year.

27. 10. 2020 17:15

The repeated lockdown of the economy has therefore necessitated a downward revision of the economic development. Komerční banka expects that the Czech economy will drop by 7.6% in real terms this year.

“We expect that a certain amount of measures intended to arrest the spreading of the disease but also negatively affecting the economy will stay with us until mid-2021. The recovery in the first half of next year will not be as visible as we originally expected. We estimate full-year economic growth at 3% next year.”

Jan Vejmělek, Komerční banka’s chief economist

Although this country’s epidemiological situation is extremely bad in an international comparison, a significant deterioration is also apparent globally. This will be reflected, naturally, in the global economy. “While we can look forward to a highly dynamic GDP in the USA, the euro area, and in Central Europe in the third quarter, clouds are really beginning to gather over the fourth quarter,” Jana Steckerová, Komerční banka’s economist, comments on the external developments.

The current lockdown of a large section of the Czech economy will delay its return to the pre-pandemic level by one whole year. “We expect that the economy will be operating at less than its full capacity until 2023,” clarifies Michal Brožka, Komerční banka’s economist. Despite this year’s record economic downturn the situation in the labour markets is not deteriorating so dramatically thanks to governmental support and schemes for maintaining employment. In spite of that, unemployment will gradually rise to 4.4% next year. Recession is being strongly felt in the dynamics of wages, where we expect them to nominally rise by 1.1% this year and by 3.0% next year. Salaries in the public sector will be the main driver.

Naturally, the autumn Covid wave will have a negative impact on public finances and their management. “The second wave of the pandemic will require additional expenditure of at least CZK 50 billion,” estimates František Táborský, Komerční banka’s strategist, adding that “this is not yet the final bill and it constitutes the largest risk in our forecast”. The CZK 500 billion approved as this year’s deficit in the national budget is a comfortable amount of finance from the Government’s perspective. “Our current forecast predicts a deficit of CZK 400 billion this year,” adds František Táborský. The sovereign’s financial management between the first and second pandemic waves was a rather pleasant surprise. In addition, the Government will not be able to carry out its capex plan; nevertheless, capex will be the highest ever.

Despite this year’s deep economic slump, inflation is staying above 3%, i.e. above the central bank’s tolerance zone. The primary reason is the faster growth of prices (excluding the food and energy segments). However, inflation should begin declining towards the approaching end of this year, and this year’s full-year average inflation should finally be 3.2%. “Next year, inflation should continue slowing down to an average of 2.3% due to the weakened economy,” adds Michal Brožka.

Following the significant easing of its monetary policy in the first half of this year, the central bank will keep the rates at their current low levels at least until the end of next year. Komerční banka’s forecast predicts that the CNB will not relax its monetary policy any further.

“The main argument against further relaxation is the prospects for the country’s inflation, which is staying above the upper limit of the CNB’s tolerance zone and the return of which to the 2% target will be gradual only.”

Martin Gürtler, Komerční banka’s economist

He believes that unconventional monetary policy tools will not be introduced.

The koruna’s exchange rate has a stabilising effect because over the last few weeks it reflected the deteriorating epidemiological situation, weakening to over CZK 27/EUR. This helped the central bank to relax the exchange conditions. “As the current pandemic situation subsides we expect the koruna to quickly return to its stronger levels; for next year, we expect its average rate at CZK 26.30/EUR,” forecasts František Táborský.

2019 2020 2021
GDP (real growth, yoy in %) 2,3 -7,6 3
Household consumption (real growth, yoy in %) 2,9 -4,8 1,9
Fixed investment (real growth, yoy in %) 2,1 -5,1 3,9
External trade balance (CZK bn) (*) 143 63,4 107,2
Industrial production (real growth, yoy) -0,1 -10,2 9,6
Retail sales (real growth, yoy in %) 4,9 -1,7 0,8
Wages (nominal growth, yoy in %) 6,4 1,1 3
Unemployment rate (MPSV, in %) 2,8 3,6 4,4
Inflation (yoy in %) 2,8 3,2 2,3
3M PRIBOR (average) 2,1 0,9 0,4
2W Repo (average) 1,9 0,8 0,3
CZK/EUR (average) 25,7 26,6 26,3

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

Jan Vejmělek
Chief Economist, Komerční banka
+420 222 008 568