Komerční banka’s economic forecast: Inflation baring its fangs

The Czech economy visibly slowed down at the end of last year when it started to feel the deterioration of the economic situation in the euro area and, primarily, the recession in German industry. The risk of a sluggish external environment will persist this year, preventing central bankers from succumbing to the temptation to hike their rates. On the other hand, they will feel pressure to do so because of rising inflation, which will continue to diverge from the CNB’s tolerance zone in the coming months.

29. 1. 2020 11:02

The most significant slowdown is over for the Czech economy. The growth of real GDP apparently declined under 2% in the last quarter of 2019. The deterioration in the economic performance of our key trade partners in the euro area, primarily Germany, was felt in the export-oriented Czech economy after a certain lag. Nevertheless, the ECB’s easing of the monetary conditions in the autumn and the persistently robust labour market resulted in a gradual stabilisation of the situation in late 2019.

“And this also promises stabilisation in the Czech Republic. We expect the Czech economy to grow by around 2% this year. Following the 2.8% recorded in 2018 and compared with the 2.4% estimated for 2019, this is a significant slowdown, but there can be no talk of a recession at all.”

Jan Vejmělek, Chief Economist of Komerční banka

The economic slowdown is apparent in industrial production, which was basically stagnant last year. Not only Czech industry is facing a slackening global demand and also a major structural change towards low-emission and electric vehicles. On the other hand, we expect a gradual recovery of investment activity, and the related industrial production, during the course of this year.

The heaviest overheating of the labour market is over for us. The economic slowdown is already reflected in a slower growth of wages, and the decline in unemployment has ended. “However, we do not expect any dramatic turnaround on the labour market,” says Michal Brožka, Komerční banka’s economist. The economic slowdown is only moderate, and this year’s rise in unemployment will also be moderate. “It will go up by only a few tenths of per cent, which will certainly not help to resolve the country’s problem with labour shortages,” adds Michal Brožka. Household consumption will therefore rise at a slower rate than last year but it will remain the key driver of the Czech economy.

Inflationary pressures continue to increase. Price hikes started to accelerate in the last few months of 2019 when inflation even jumped over the upper limit of the CNB’s tolerance band after seven years. “And it’s not the end of the story,” warns Michal Brožka, adding that “spring will probably see inflation above 3.5%”. Thereupon it will head downwards again relatively briskly; however, it will oscillate around 3% on a full-year basis.

Right at the beginning of 2020, Czech koruna surprised by its record appreciation relative to the euro and its dominance in the region. We expect it to retain its strength throughout the first half of this year. “It will be supported by speculation on the CNB’s rate hikes and the optimism on global financial markets,” clarifies Komerční banka’s strategist František Táborský. In the second half of the year, the koruna is expected to weaken again according to KB’s forecast, but it will stay within its long-term band. “Developments outside the Czech Republic will send the koruna down to weaker levels,” adds Jana Steckerová, KB’s economist, adding: “The second half of the year will see the onset of recession in the US, and pessimism will also spill over to the euro area, with the fear of a bad deal between the EU and the UK coming on top of this.” 

Rising inflation in early 2020 will result in the CNB’s continued emphasis on the option of rate hikes. Nevertheless, the risks for economic growth persist and the CNB will probably wait for an economic recovery without changing the rates. Since we expect the economy to grow at a sub-potential rate and inflation to subside rapidly, we do not expect another rate hike this year.

Following four years of surpluses, the result of public finance as a whole will return to a deficit this year. According to KB’s forecast, the national budget alone will end with a deficit of around CZK 60 billion.

“Tax revenue no longer supports the national budget in excess of the plan as we saw in preceding years. On the other hand, the government’s investments were surpassing the original plans in the last two years.”

František Táborský, clarifies Komerční banka’s strategist
GDP (real growth, yoy in %)2,82,42
Household consumption (real growth, yoy in %)3,22,82
Fixed investment (real growth, yoy in %)7,50,91,2
External trade balance (CZK bn) (*)381503504
Industrial production (real growth, yoy)3,10,41,4
Retail sales (real growth, yoy in %)55,23,2
Wages (nominal growth, yoy in %)7,675,6
Unemployment rate (MPSV, in %)3,12,83
Inflation (yoy in %)2,12,83
3M PRIBOR (average)1,32,12,2
2W Repo (average)1,11,92
CZK/EUR (average)25,725,725,5

Source: The Czech Statistical Office; the Czech National Bank; Ministry of Labour and Social Affairs; Macrobond; Economic and Strategic Research, Komerční banka

Note: (*) external trade as per cross-border statistics

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