Komerční banka’s economic forecast: Low inflation despite high wages

Komerční banka’s updated macroeconomic forecast expects the Czech economy to grow at a rate of 3.8% following last year’s 4.6%. According to Viktor Zeisel, Komerční banka’s senior economist, this year will be strong. “Internal demand and investment activity will be the main drivers,” he notes.

The continuing rapid growth in wages will again be a characteristic feature of this year’s macroeconomic development. Last year, wages rose by 7%, and they may rise by up to 8% this year. According to Viktor Zeisel, “the salary increases in the public sector at the end of last year will also be reflected in this year’s numbers. In addition, the beginning of this year saw major agreements on wages in the private sector.” 

This year’s rate of inflation will write 1.9% on average, i.e. below the central bank’s target. The unexpected low inflation in the first few months of this year has prompted the downward revision from the originally expected 2.1%. Jan Vejmělek believes that primarily the exchange rate and its development is behind the subdued inflation. “The koruna’s appreciation by 6% to the euro over the past year, and even almost 20% to the dollar implies that our imports are cheaper.”

Due to the weaker inflationary pressures, currency conditions will not have to be heavily tightened. “The surprisingly low domestic inflation and the decline of confidence in the economy in Western Europe will outweigh the weaker rate of exchange in central bankers’ decisions. Thus, the CNB will only hike the rates once until the end of this year,” predicts Viktor Zeisel.

The koruna’s rate should break through the level of CZK 25/EUR this year. However, because of the CNB’s slower rate hikes, it will happen later than we expected in our previous forecast. “But the Czech currency continues to attract foreign investors, for it offers a clear-cut story: long-term appreciation. Once the CNB’s next rate hike approaches we can see the euro for less than CZK 25,” predicts Marek Dřímal, a strategist at Komerční banka. The dollar may even drop to CZK 19.

Issuing new debt will become more expensive for the government during the year. The gradual return of inflation to 2%, the rising market yields in the euro zone due to the approaching end of the ECB’s quantitative easing, the CNB’s rate hikes and the Finance Ministry’s strong offering will translate into a growth in Czech bonds’ yields. Marek Dřímal expects that “at the end of the year, the sovereign will borrow through ten-year bonds yielding 2.10%.” Because of the significant increase in current expenditure but also the expected increase in capital expenditure (also thanks to claiming planned but unspent expenditure) this year the national budget is expected to close in a deficit, which Marek Dřímal expects to amount to CZK 40 billion.

A major risk for the Czech economy is the global economy’s situation caused by the growing protectionist tendencies. We regard the euro zone’s weaker economic performance in the first quarter of this year as temporary only. This year, the euro zone’s economy should grow at the same pace as last year (2.5%), and the US economy could even accelerate by a tenth of a percentage point to 2.4%.

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

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