Komerční Banka’s Economic Forecast - Hawks Returning
The pandemic-induced recession is over. The currently improving epidemiological situation and the ongoing vaccination suggest that the Czech economy will return to growth in the second quarter of this year. Restrictions will be relaxed gradually, and we therefore continue to expect a more vigorous economic recovery in the second half of the year. The reopening of brick-and-mortar shops will result in higher retail sales as early as May while the summer months should see the situation improving in personal services as well. Private investments will also recover gradually. Primarily the public sector is maintaining investment activity at present. The Czech economy will continue to benefit from strong external demand.
The Czech economy will already grow this year. “Following last year’s unprecedented fall by 5.6% it will grow 3.4% this year according to Komerční banka’s updated forecast. Compared with the January forecast, we have increased the growth prospects for 2021 by a significant 0.8 percentage points,” says Jan Vejmělek, Komerční banka’s Chief Economist. The measures to counter the pandemic and the lockdown of a considerable part of retail and services in the first four months of this year have prompted a downward revision of household consumption expected this year from the original 2.8% to 1.8%; on the other hand, investment activity has increased (to 1.8%), in particular thanks to public investments. The global demand will also contribute to the recovery. “This year, the US economy’s growth will even be the fastest for the last few decades,” adds Jana Steckerová, Komerční banka’s economist. “We are more optimistic about this year than the currently available forecasts of official institutions such as the Ministry of Finance or the Czech National Bank,” adds Jan Vejmělek.
Recovered internal demand will keep inflation above the CNB’s target.
“The government’s expenditure will significantly support economic growth this year but over time, household consumption and investment should become the main drivers of the economy. It is quite likely that inventories will be replenished and the volume of production in progress will increase because of the missing components. The rising household consumption will generate inflationary pressures and inflation will therefore stay over 2% this year. Next year, the slowing growth of import prices and a tighter monetary policy should navigate Czech inflation back towards 2%.”
The pandemic has dealt a brutal blow to the public finance and this year will be even worse. Last year, the public purse was closed with the largest deficit ever: 6.2% of GDP. Nevertheless, the national budget posted a smaller than planned deficit. “We expect a similar scenario this year again. H2 2021 should bring household consumption recovery, and hence a stronger collection of indirect taxes,” forecasts Komerční banka’s strategist, František Táborský. On the other hand, we believe that this year’s ‘covid’ expenses will again be lower than the government expects. “In spite of that, this year’s deficit will exceed last year’s historical record value,” František Táborský voices his concerns. In terms of the financing of sovereign debt and the growth of government bond yields, the worst is over for the market, although the Czech central bank has made it very clear that it wants to compete for a regional primacy in rate hikes and the cabinet is not planning any significant consolidation of government finances. “All of this has been factored into the current bond prices, and investors’ demand for Czech debt is enormous; there is no question that the advantageous yield to risk ratio is the reason,” clarifies František Táborský.
In March, koruna got rid of its covid premium and is now returning to its original strengthening trajectory. It is set to climb to CZK 25.50/EUR by the end of H1 2021 and should close this year at CZK 25.10/EUR. It is expected to reach its pre-covid levels by the end of H2 2022. “In this region, the Polish zloty has a greater potential to strengthen but in our opinion the Czech currency offers the best risk to yield ratio,” František Táborský assesses the chances for koruna this year.
The result of the CNB Board’s May meeting will be crucial for the coming weeks in financial markets. We believe that it will spur the market interest rates to growth and, in combination with the euro’s continuing strengthening to the US dollar and the positive global sentiment, push koruna towards stronger levels.
“We think that the CNB’s rates will remain at their current low levels until November, when we expect their first hikes. The main reason for their continued stability for a large part of this year is the uncertainty surrounding the evolution of the pandemic and the economy. However, the risks of our forecast of the monetary policy rates are biased towards their earlier hikes, which may come as early as Q3 2021.”
|GDP (real growth, yoy in %)||-5,6||3,4||4,7|
|Household consumption (real growth, yoy in %)||-5,2||1,8||5,3|
|Fixed investment (real growth, yoy in %)||-8||1,8||7,1|
|External trade balance (CZK bn) (*)||184||145||136|
|Industrial production (real growth, yoy)||-7,1||8,8||6,5|
|Retail sales (real growth, yoy in %)||-0,6||0,9||5,3|
|Wages (nominal growth, yoy in %)||4,4||4,8||5|
|Unemployment rate (MPSV, average, in %)||3,6||4,2||4,3|
|Inflation (average in %)||3,2||2,5||1,9|
|3M PRIBOR (average)||0,9||0,4||1,1|
|2W Repo (average)||0,8||0,3||1|
Source: CSO, CNB, Ministry of Labour and Social Affairs, Macrobond, Economic and Strategic Research, Komerční banka