Komerční banka’s macroeconomic forecast: Low all around, the highest at home

For the time being, the Czech economy is countering the deteriorating external environment more than bravely, although even in Czechia industrial producers’ sentiment is being dampened much faster than would (for now) match reality. The US and EU central banks are definitively turning the rudder back again towards rate cuts. Thus, interest rates will decline. In the light of the robust inflationary prospects the CNB will not cut its rates. Stability of interest rates on the part of the central bank will therefore accompany us for the rest of this year and for the whole of next year.

31. 7. 2019 10:00

According to Komerční banka’s updated forecast, the Czech economy will grow by 2.7% this year following last year’s 2.9%. Next year, economic growth will cool down to 2.1%.

“2020 will see an economic slowdown, but no recession. Our forecast does not envisage any recession.”

Jan Vejmělek, Komerční banka’s Chief Economist

Economic growth will be helped by internal and external demand this and next year. “The Czech economy’s resistance to German industry’s recession is surprising; this year’s second quarter seems to be the best ever in terms of the balance of external trade,” adds Viktor Zeisel, KB’s Head Economics.

The sentiment of primarily industrialists around the globe has fallen to many-year lows. But real-life data do not yet indicate any disaster. The US economy is enjoying the last period of its longest-lasting expansion in the US’s history. “Through relaxing its monetary policy, Fed will seek to extend the expansion for a longer time, but in our view it will not be successful for longer than until the second half of next year,” says Jana Steckerová, an economist at Komerční banka. “We therefore continue to expect an economic recession in the US for the second half of 2020,” she adds. Concerns about an economic slowdown will also make the European Central Bank relax the monetary conditions. In our opinion, the ECB will also renew the quantitative easing programme in addition to cutting rates. “The euro area’s economy will slow down in 2020 but we do not expect any recession,” adds Jan Vejmělek.

Internal inflationary pressures will slacken only very little next year. The weakening of both the economic growth and wage dynamics will be reflected in lower core inflation, but foodstuffs will be more expensive, mainly because of drought, and the prices of cigarettes and spirits will rise significantly. While this year’s average inflation will be 2.6%, the figure is 2.7% for 2020. Inflation in the upper half of the tolerance zone will be the reason for the CNB refraining from cutting the rates.

“The reason is the large increase in excise duties at the beginning of next year. Inflation will go up by 0.8 pp because of this. This and next year, the CNB will prefer rate stability.”

Viktor Zeisel, KB’s Head Economics

This year’s exchange rate stability will continue until the end of the year; at its very end we expect a weakening related to the year-end effect. Next year we expect the koruna to depreciate over CZK 26/EUR in connection with the deteriorating prospects for the Czech and international economy. “In this respect, we see a risk of an even more significant weakening of the koruna,” adds Komerční banka’s strategist František Táborský.

The slowdown in economic growth is impairing the performance of Czech public finance. The Czech economy no longer supports higher tax revenue the way it did in the preceding years; on the other hand, a weaker investment activity will rescue the national budget from an even deeper deficit. “The government’s finances will reach the worst result since 2015, because according to the Finance Ministry’s plan they will end up in a deficit of CZK 40 billion,” forecasts František Táborský, adding: “Next year, we expect further deterioration in the national and municipal government’s budgets, which will result in the first deficit in public finance following five years of surpluses.”

GDP (real growth, yoy in %)2,92,72,1
Household consumption (real growth, yoy in %)3,32,72,1
Fixed investment (real growth, yoy in %)7,12,23,4
External trade balance (CZK bn) (*)383486440
Industrial production (real growth, yoy)3,11,33,1
Retail sales (real growth, yoy in %)54,22,1
Wages (nominal growth, yoy in %)7,66,55,3
Unemployment rate (MPSV, in %)3,12,83,2
Inflation (yoy in %)2,12,62,7
3M PRIBOR (average)1,272,162,25
2W Repo (average)1,251,942
CZK/EUR (average)25,6525,726,1

Source: The Czech Statistical Office; the Czech National Bank; 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