Komerční banka’s economic forecast: Economy breathing but fitness is a long way off
The Czech economy is gradually emerging from a recession into which it was plunged by the government’s measures to combat the covid-19 pandemic’s spread. The paralysis of the economy was the heaviest in April; since May, we have seen the measures being progressively relaxed and economic activity returning. Despite the deteriorating epidemiological situation the economic life will certainly return, albeit slowly, and we expect it to recover to its pre-coronavirus level towards the end of next year.
The Czech economy has apparently gotten over the worst provided that the April extent of restrictive measures, adopted in response to the potentially continuing deterioration in the epidemiological situation in the coming months, is not repeated. According to Komerční banka’s latest forecast the Czech economy as a whole will experience a decline of 5% this year. This will be the deepest drop in the Czech Republic’s modern history since 1993. Nevertheless, compared with the preceding forecast from early June, this will be an improvement of 1.8 pp.
The level of uncertainty accompanying the macroeconomic forecast remains extremely high. The bottom from which the economy is rebounding is not yet known. The CSO will publish its first estimate of GDP for Q2 2020 two weeks earlier than has been its practice up to now, i.e. already this coming Friday. “Any surprising number has the potential to disrupt the FY estimates,” says Martin Gürtler, Komerční banka’s economist. Another wave of uncertainty is associated with the external environment. “Although economic activity in the United States and the euro area is gradually returning to the normal, it will take a long time before it reaches the pre-coronavirus level,” adds Jana Steckerová, Komerční banka’s economist. “Equally importantly, the evolution of the epidemiological situation in the Czech Republic and globally and governments’ responses to it constitute a source of risk,” adds Jan Vejmělek.
“In the end, the monthly April and May data coming from industry, construction, and exports have not turned out to be as disastrous as we had feared.”
While production is suffering in the current recession, consumer demand has been relatively resistant so far. The March lockdown of entire sectors of the economy has primarily impacted on services, in particular those related to accommodation and tourism, and it has also been dramatically felt in automotive production. Rather surprisingly, household consumption has resisted. In fact the May retail sales were, in real terms, even higher than a year earlier. Households’ appetite to consume has been weakened relatively little because the labour market has deteriorated only a little. “The government’s Antivirus scheme and the preceding surplus of vacancies have significantly stifled growth in unemployment,” explains Michal Brožka, Komerční banka’s economist, adding: “The question is for how long.” This forecast envisages an extension of the scheme until at least the end of this year, which will also limit the rise in unemployment. We expect unemployment to peak over 5% at the beginning of next year.
In the economy, recession is traditionally associated with a trend of declining inflation, but its rate remained higher in Q2. Economic performance was rapidly falling, but inflation even returned above the CNB’s tolerance zone in June when it rose to 3.3%. In particular the acceleration of core inflation, which climbed to 3.5%, was a surprise. Michal Brožka notes that significantly higher import prices contributed to the higher rate of inflation. “We have therefore had to revise this year’s expected inflation from the original 2.4% to 3.0%. However, average inflation will be slightly below the CNB’s target next year,” Michal Brožka predicts.
”Thus, the currently high rate of inflation will definitely not be a reason for the central bank to hike the rates at its Board meeting in August.”
The central bank’s key rate will stay at its current low level until the end of next year. “But we still see the risk that the monetary policy will have to be eased even more, which may also be attributable to the Czech koruna strengthening again,” Martin Gürtler explains, adding: “However, in such a case the CNB would already have to resort to non-standard instruments, such as imposing an FX floor again.” The market rates rebounding from the bottom and the financial markets’ positive sentiment towards emerging economies’ currencies have helped the Czech koruna’s rate in recent weeks. “We believe that this trend will continue and the Czech koruna is therefore set to strengthen some more,” František Táborský, Komerční banka’s strategist, specifies the prospects for FX rates.
This year, the national budget will end up with a better result than the deficit of CZK 500 billion expected by the government, mainly due to a lower amount of capital expenditure. “Investments will face the economy’s limited capacities, failure to prepare projects, and lack of time to carry out projects, this year,” adds František Táborský.
|GDP (real growth, yoy in %)||2,5||-5||6|
|Household consumption (real growth, yoy in %)||3||-3,5||2,5|
|Fixed investment (real growth, yoy in %)||2,7||-14,3||0,5|
|External trade balance (CZK bn) (*)||142||122||153|
|Industrial production (real growth, yoy)||-0,1||-15,2||12,1|
|Retail sales (real growth, yoy in %)||4,9||-3,2||2,2|
|Wages (nominal growth, yoy in %)||6,4||4,5||3,8|
|Unemployment rate (MPSV, in %)||2,8||4,1||4,9|
|Inflation (yoy in %)||2,8||3||1,7|
|3M PRIBOR (average)||2,1||0,9||0,5|
|2W Repo (average)||1,9||0,8||0,25|
Source: CSO, CNB, Ministry of Labour and Social Affairs, Macrobond, Ekonomic and Strategic Research, Komerční banka