Komerční banka’s macroeconomic forecast: hitting the limits

In two months, the Czech economy will step into the fifth calendar year in a row with a positive economic growth. The second longest period of expansion in the Czech Republic’s history means that the hitherto existing sources of growth are being exhausted and a large part of the Czech economy is hitting its limits.

30. 10. 2018 10:30

According to Komerční banka’s updated macroeconomic forecast, this year the Czech economy will grow by 2.9%, measured by the GDP in real terms, and the growth will be 2.7% next year.

 “At this moment, the Czech economy has no resources for anything more: it has no more workforce, it has no more production capacities.”

 Jan Vejmělek, Komerční banka’s Chief Economist

The extremely tense labour market and the maximum utilisation of the current capacities will prevent the Czech economy from accelerating its growth. “We cannot expect an above 3% growth of the Czech economy on a long-term basis without productive investments,” adds Jan Vejmělek.

But capacity limitations are not the only challenge that the Czech economy is currently facing. The other challenge is, unquestionably, the risk of unfavourable international developments. “For the rest of this year and then 2019 the prospects for the United States’ and the euro area’s economies are relatively favourable, but geopolitics continues to be a bogey,” says Jana Steckerová, Komerční banka’s economist. The Brexit deal does not yet have any definitive shape, serious economic problems persist in Turkey, and the threat of trade wars escalating is looming. All of this can translate into declining confidence and adversely impact both household consumption and investment, thereby depressing economic growth in the euro area and in the Czech Republic.

The capacity limitations and the external risks imply that internal demand will drive the Czech economy this and next year again. Household consumption will continue to be supported by the high rate of employment and rising wages.

“Despite the slowdown in the Czech economy’s growth, wages will continue to rise briskly. This is a consequence of the continuously tense labour market.”

Viktor Zeisel, Komerční banka’s Head Economist

In the light of the capacity limitations, investments are also increasing; at last, infrastructure projects funded from the public purse are taking off and will be helping the country’s economy for several quarters. “But we are concerned about the rising risk of the general uncertainty in the global economy and in this country resulting in the investment activity slackening in the second half of 2019,” adds Viktor Ziesel.

The surplus in the current account of the balance of payments and the increasingly attractive interest rate differential notwithstanding, the Czech currency is not appreciating this year. The reason is that it is, as are the neighbouring regional currencies, paying for the global risks. The koruna will strengthen only cautiously over the year. “Before the Czech koruna manages to get under EUR/CZK25 in the second half of next year, we expect an economic cooling to arrive from the US, which will weaken the koruna again,” forecasts Jakub Matějů, Komerční banka’s strategist.

Despite the weaker economic growth we have revised our inflation outlook upwards to 2.2% for this year and to 2.4% for next year. Wage pressures are reflected in rising unit labour costs and in declining profit margins of companies and their strengthening endeavours to pass the higher costs through into end prices for consumers. “Inflation is therefore firmly fixed above the 2% target, in the upper part of the CNB’s tolerance zone,” clarifies Viktor Zeisel. The CNB will therefore continue restricting the still relaxed monetary policy. “And since the exchange rate is not growing stronger in line with what the central bankers would like to see, the central bank will continue hiking its rates,” explains Viktor Zeisel. “In the autumn of 2019, the CNB’s key rate should hit 2.50%, which we believe matches the lower estimate of a neutral rate,” adds Viktor Zeisel.

Next year, the ebbing growth across the Czech economy will slow down the growth in tax revenue. According to Jakub Matějů, “the heyday will be over for the national budget.” We are forecasting the national budget deficit at CZK 50 billion, while we expect this year’s deficit at only CZK 10 billion. “The sovereign’s deteriorated finances will also be reflected in rising yields from government bonds; they will climb to 2.8% next year, approaching the interest rate swap curve which is set to bear flatten further,” adds Jakub Matějů.

2017 2018 2019
GDP (real growth, yoy in %) 4,5 2,9 2,7
Household consumption (real growth, yoy in %) 4,4 3,5 2,9
Fixed investment (real growth, yoy in %) 3,7 8,2 1,4
External trade balance (CZK bn) (*) 443 361 375
Industrial production (real growth, yoy) 6,5 3,1 3,3
Retail sales (real growth, yoy in %) 5,5 4,4 3,6
Wages (nominal growth, yoy in %) 6,2 8,3 6,4
Unemployment rate (MPSV, in %) 4,1 3,2 3
Inflation (yoy in %) 2,5 2,2 2,4
3M PRIBOR (average) 0,41 1,34 2,46
2W Repo (average) 0,21 1,25 2,31
CZK/EUR (average) 26,33 25,6 25,2

Source: The Czech Statistical Office; the Czech National Bank; Ministry of Labour and Social Affairs (MPSV); Macrobond; Economic and strategic research, Komerční banka
Note: (*) external trade as per cross-border statistics