Komerční Banka´s Economic Forecast

Vaccination promises return to the normal life, including economic life in the second half of this year. However, the beginning of 2021 is still marked by the very unfavourable pandemic situation and the lockdown of important service sectors. We are afraid that restrictions will be relaxed at a slower pace, expecting the return to the normal social and economic life only with the summer months.

28. 1. 2021 13:00

Fortunately, the catastrophic economic scenarios that warned against a double-digit plunge for 2020 did not materialise. Although at the end of last year the pandemic situation in the Czech Republic was one of the worst globally, the Czech economy did not collapse. Quite the opposite: it turned out that the sectors that the government had let breathe, typically industry, were returning to their pre-pandemic levels towards the end of the year.

“Czech export-oriented industry clearly profited from strong external demand and, unlike the spring months, also from open national borders. Paraphrasing the opinion on the economy voiced by the CNB Governor, Jiří Rusnok, according to our forecast we are now on the way out of this vale of tears and summer already may truly be sunlit.”

Jan Vejmělek, Komerční banka’s Chief Economist

The pandemic has plunged the Czech economy into the deepest recession ever; we estimate last year’s fall at 6%. But an improvement from the original -7.6% can be seen compared with the preceding forecast. This, on the other hand, constitutes a higher statistical base for this year. In combination with the currently locked section of the country’s economy we have therefore slightly downrated the prospects for this year. Nevertheless, the Czech economy will grow at a rate of 2.6% this year.

The risk inherent in the forecast is the potential failure of the vaccination exercise.

Economic policies will continue to play a key role. Last year we saw a major relaxation of the monetary policy, including support for maintaining financial stability. The central bank will keep the relaxed policy for the largest part of this year.

“However, at the end of this year we expect the first rate hike that will trigger the process of a gradual normalisation of the monetary policy in 2022 and 2023,” estimates Martin Gürtler, a Komerční banka economist.

The reason is that the second half of this year should already offer some tangible results of the improving economic situation and also see the disappearance of the main uncertainties concerning the further development of the pandemic and also of consumer prices.

“We expect inflation in 2021 to slow down to slightly less than the CNB’s 2% inflation target thanks to less expensive foodstuffs, weaker internal demand, and lower import prices,” says KB economist Michal Brožka.

He believes that inflation will oscillate close around 2% in the coming years.

The fiscal policy also contributed to the highly positive result of last year through the action of the automatic stabilisers supplemented with proactive tools to underpin the corporate sector, such as the governmental guarantees for loans through a number of COVID schemes. The various versions of the Antivirus scheme, which helped to slow down the growth of unemployment quite significantly, played an important role in respect of households’ disposable income. The effect of the extra ‘facemask allowance’ for pensioners at the end of last year and the lowering of personal income taxes in connection with the abolishment of ‘super gross wages’ will significantly boost household consumption this year.

“Our calculations indicate that higher pensions should result in a temporary growth of almost 2% in household consumption; lower taxes should support a longer lasting growth of up to 3.4%,” Martin Gürtler quantifies the positive impact. Money from the recovery fund will gradually help to boost investment activity. “Thanks to the fund, even more money will flow in from the EU funds in the new programming period than in the past period,” adds Jana Steckerová.

The downside of the fiscal expansion is its impact on public finance management.

“Public finance landed with the deepest deficit ever last year and we expect the deficit to deepen even more this year. On the other hand, the whole European Union shares this trend and the Czech Republic remains on the better side of the boat. However, the extent of public finance consolidation, over which a question mark continues to hang, will be crucial in the coming years. Given this year’s 4% growth, the koruna should be around CZK 25.20/EUR by the end of this year. Thus, it should return to its almost pre-pandemic levels in two years.”

František Táborský, Komerční banka’s strategist, rates the picture of this country’s public finance

The CNB’s surprisingly daring forecast helped the koruna significantly at the end of last year. We consider that the central bank’s actions will be the key factor this year as well. The rising chances of the central bank’s first rate hike before the end of this year will support the koruna in advance in its further shift to stronger levels.

“Given this year’s 4% growth, the koruna should be around CZK 25.20/EUR by the end of this year. Thus, it should return to its almost pre-pandemic levels in two years,” forecasts František Táborský.

Macroeconomic forecast

2019 2020 2021
GDP (real growth, yoy in %) 2.2 -6.0 2.6
Household consumption (real growth, yoy in %) 2.9 -4.8 2.8
Fixed investment (real growth, yoy in %) 2.2 -8.6 0.6
External trade balance (CZK bn) (*) 145.7 179.7 153.1
Industrial production (real growth, yoy) -0.1 -7.5 9.8
Retail sales (real growth, yoy in %) 4.9 -0.9 1.2
Wages (nominal growth, yoy in %) 6.4 3.4 3.0
Unemployment rate (MPSV, average, in %) 2.8 3.6 4.3
Inflation (average in %) 2.8 3.2 1.8
3M PRIBOR (average) 2.1 0.9 0.4
2W Repo (average) 1.9 0.8 0.3
CZK/EUR (average) 25.7 26.5 25.6

Jan Vejmělek
Chief Economist, Komerční banka
+420 222 008 568