Komerční Banka´s Macroeconomic Forcast - Czech economy losing power

The Czech economy will experience a shallow recession at the end of this and the beginning of next year. It will result from declining demand and expensive energy. The latter has been impacting on Czech households for quite some time, while problems in the production sector, mainly attributable to the German recession, will gradually arrive in addition to this. Germany, our largest trade partner, will probably report an economic downturn already for the third quarter of this year. The cabinet’s measures in the fight against high energy prices will help to reduce inflation in the last few months of this year, but we will only see it dropping to the inflation target in more than two years. The new CNB Board does not intend to fight inflation via rate hikes. On the other hand, it will continue its interventions to defend the koruna against weakening.

25. 10. 2022 16:30

Although the Czech economy will plunge into recession towards the end of this year, it will report a real growth of 2.7% for full year 2022. The reason is the robust growth primarily in the first half of this year while the third quarter will probably not be marked by a downturn either. “Compared with the July forecast, which envisaged a FY 2022 growth of 2.5%, we have somewhat improved the expected growth,” notes Jan Vejmělek, Komerční banka’s Chief Economist. But recession is sure to come, although only in approximately half the size compared with our July assumptions and one quarter later. But, naturally, it will have an impact on the Czech economy’s performance in 2023.

For 2023, we have slashed the expected real growth to only 0.5% from the original 1.7%. In our forecast, the main reason for the Czech economy going into recession continues to be the general slump in demand: it is lower not only for consumer but also for industrial goods. Although the recession will be shallower, the subsequent recovery will be slower than we expected three months ago.

“We expect economic activity to reach its pre-crisis level only in the third quarter of next year, i.e. one quarter later.”

Martin Gürtler, Komerční banka’s chief forecaster

Disrupted gas supply is a significant risk of the whole macroeconomic forecast. Should natural gas flow into the Czech Republic in significantly smaller quantities or even not at all, such fact necessitating a reduced functioning of industry, the recession will be much deeper because of the Czech economy’s high energy intensity.

Despite the onset of recession, the labour market remains tense. Unemployment is close to the pre-pandemic levels, which were record low. We consider that the shallow recession that we expect will cause an only minor deterioration; in the case of the general rate of unemployment, its growth to around 3% from the current 2.5%. The combination of a high employment rate and an inflationary environment will be felt in wages and their development. Our estimate is that the average wage will grow by 7.0% this year, accelerating by as much as 12.2% next year. “Thus, wages will decline by approximately 7% in real terms this year, while they should no longer decline in real terms next year,” Martin Gürtler assesses the payroll prospects.

The inflation peak will be lower but the quick growth of consumer prices will subside at a slower pace. In the light of the more favourable development of prices over the last three months and the cabinet’s approved measures that will reduce inflation by the end of this year, we have cut this year’s expected full-year inflation to 15.1% from the originally estimated 16.8%. However, we have revised our forecast upwards from 11.2% to 12.0% for next year. “Annual inflation will therefore decline to the central bank’s 2% target only in late 2024/early 2025,” Martin Gürtler underlines the unfavourable inflation prospects.

The Czech National Bank will probably keep the current rates until mid-2023, when it may begin cutting them progressively. Headed by Aleš Michl, the new CNB Board continues to make it clear – through its last two decisions and the statements of its representatives – that it considers the current level of the rates to already be sufficient for checking the inflation. “We regard the risks of our interest rate forecast as biased in favour of higher rates, mainly because of the faster wage growth that we expect and to the rampant inflationary expectations. The Czech cabinet’s continued eased fiscal policy and the ongoing rapid rate hikes outside the Czech Republic are also acting in this direction,” clarifies Martin Gürtler.

While the CNB is not in the mood to hike the rates again, both the Fed and the ECB will continue to do so. “Inflation in the US and in the euro area has peaked, but it will return to the central banks’ targets only very reluctantly,” Jana Steckerová, Komerční banka’s economist, notes the main reason for this approach. Both the ECB and the Fed will have to carry on with their aggressive rate hikes, even at the cost of plunging both economies into a moderate recession. Our forecast indicates that the Fed’s key rate will climb to 4.6% in January 2023, and the ECB will have 3% in the first half of 2023.

The national budget’s deep deficits are becoming a new normal. This year, the deficit may shoot up to the recently approved CZK 375 billion, which would be the second worst result ever right after the pandemic year 2021. Against the backdrop of the negative impacts of an economic recession, energy crisis, and deep structural deficit, we expect the public finance consolidation to continue at only a sluggish pace in the coming years. “Next year, we expect the national budget’s deficit to amount to CZK 315 billion as against the CZK 295 billion proposed by the cabinet,” notes Jaromír Gec, Komerční banka’s strategist. We are also aware of the risk that it will not be possible to cover all new expenditure items by additional revenue, which may further deepen the deficit in 2023. The high inflation will continue to hinder the growth of the public debt to nominal GDP ratio.

The Czech koruna will continue to feel pressures for its weakening. In the Central European region, the koruna is the only currency to resist losses, although in this resistance it is being significantly helped by the CNB through its interventions. We estimate that the CNB has spent almost one fifth of its forex reserves to defend the koruna between May and 10 October. We believe that the central bank will gradually cease to aim at a specific level of the exchange rate, instead allowing the koruna to approach its equilibrium value through its slight weakening with a view to minimising the risk of the need to intervene in growing volumes.

“We expect on the whole that despite the CNB’s presence in the market, the koruna will weaken to CZK/EUR 24.85 before the end of this year and to approximately CZK/EUR 25.10 within a year due to the deteriorated fundamentals.”

Jaromír Gec, Komerční banka’s strategist

Macroeconomic forecast

GDP (real growth, yoy in %)
Household consumption (real growth, yoy in %)
Fixed investment (real growth, yoy in %)
External trade balance (CZK bn)
Industrial production (real growth, yoy)
Retail sales (real growth, yoy in %)
Wages (nominal growth, yoy in %)
Unemployment rate (MPSV, in %)
Inflation (yoy in %)
3M PRIBOR (average)
2W Repo (average)
EUR/CZK (average)
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