Komerční Banka’s Economic Forecast: Stop to the Virus, Back to the Normal

At this moment, the worst is over for the Czech economy. The economy is steadily recovering, albeit slowly, but in terms of the data to be published the worst is still ahead of us. Although the recession has hit only a small part of the first quarter the GDP dropped by 3.6% compared with Q4 2019. For the second quarter, we expect a plunge of 8.6% compared with the first quarter. This will constitute the worst result in the Czech Republic’s history. For FY 2020, the economy will decline by 6.8% according to Komerční banka’s basic scenario.

The development until the end of this year will critically depend on the following factors: (1) The speed at which life returns to the normal on the part of our key trade partners and the national borders are opened; (2) Whether the government quickly and effectively delivers on its promise of fiscal help to the full extent; and (3) The epidemiological situation at the end of the year: whether or not a second wave of the disease arrives. “This is why we at Komerční banka have also prepared alternative scenarios of development,” says Michal Brožka, a KB economics. “In the pessimistic scenario, the economy could well plunge by 10% this year.”

The current recession has primarily hit the service sector, which is not ready for such situations, whereas industry is accustomed to cyclical ups and downs. In addition, the service sector is a more important employer, which will also be felt in the labour market. Fortunately, the current difficulties have reached the labour market in a condition of a very large surplus of vacancies. KB forecasts that the unemployment rate will rise over 7.5% during the third quarter, but it will start to decline again at the end of the year. The impact of the recession will also be felt in earnings. “The rate of wage growth will slow down from last year’s 7.1% to this year’s less than 3%,” says Michal Brožka.

In the economy, recession is traditionally associated with declining inflation and it will be no different this time. The growth in consumer prices peaked at 3.7% in February. At present, inflation is slowing down rapidly mainly because of cheaper motor fuels; until the end of the year, core inflation will decline due to weak demand. “In the second half of this year inflation will drop under the central bank’s 2% target,” forecasts Michal Brožka. “Perceived inflation, however, will not go down too much; households will feel the rising prices of foodstuffs,” he adds. For this year, KB’s forecast envisages an average inflation rate of 2.4%.

The central bank will retain an easy monetary policy for a longish time. The CNB has cut its key rate from February’s 2.25% to only 0.25% and it will complete this leg of the cycle in June by cutting the rate to a technical zero, i.e. 0.05%. “It should stay there throughout next year too,” Martin Gürtler, Komerční banka’s economist, clarifies the prospects. He believes that the main reason is the development outside the Czech Republic, which rather copies the alternative scenario of the CNB’s new forecast. “Already the results for the first quarter have shown how much the coronavirus has sliced away from the world economies’ growth,” adds Jana Steckerová, a KB economist. The Czech koruna has weakened significantly in response to the global recession and the falling interest rates. Its euro rate approached CZK 28/euro several times towards the end of March. “As the economy restarts, the koruna will return to stronger levels,” František Táborský, KB’s strategist, unveils the forex developments a little.

The current economic crisis has completely recast the Czech public finance. KB forecasts that the national budget will land in a record deficit of around CZK 340 billion this year. “Due to the Czech economy’s deep plunge alone, we expect a shortfall of CZK 180 billion on the national budget’s revenue side this year,” František Táborský highlights one of the main reasons. The government’s discretionary measures to fight the coronavirus will have a negative impact on its own results, both on the revenue and expenditure sides. “From the perspective of public finance overall, municipalities should be relatively better off, and also health insurance companies: they should benefit from their budgetary responsibility in the past years and the increase in payments for the people insured by the State,” adds František Táborský.

Macroeconomic forecast

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

Jan Vejmělek
Chief Economist, Komerční banka
+420 222 008 568
jan_vejmelek@kb.cz