The economy of the eurozone, which absorbs the overwhelming majority of Czech exports, apparently fell into recession in the last quarter of 2011, and it is expected to stay in recession in the first half of this year. In the last two years the Czech economy has grown solely thanks to net exports, and the economic slowdown in the eurozone is therefore bound to be reflected in the Czech economy’s performance as well.

We expect that the Czech economy performed better last year, measured by a real GDP growth of 1.7%, and we envisage a minimum growth of 0.1% for this year. Internal demand will contribute negatively to the growth as we expect household consumption to drop by almost 1% in real terms this year. Households’ purchasing power will be eroded by another wave of the fiscal restrictions effective from the beginning of this year, higher inflation, low growth in nominal wages, and rising unemployment. The reason is that the rise in the rate of unemployment, from 8.6% in December 2011 to 9.4% at the end of this year, is consistent with the de facto stagnation of economic growth.

As early as October 2011, inflation rose above the central bank’s 2% target and it is expected to stay at this level for the whole of this year. In the first quarter, it will even jump over 3% y/y. The key factors that have been fuelling inflation in the last few months include a depreciating Czech currency and the January increase in the VAT rate, while food vendors reflected more than 50% of the change in the VAT rate in their prices before the end of last year. Following last year’s 1.9%, we expect this year’s average rate of inflation to rise to 2.9%.

The CNB is expected to keep its rates unchanged at 0.75% until the end of 2013. The main reason is the low inflationary expectations, significant uncertainties surrounding the development of the external environment and the weak internal demand. Although inflation has stayed above the CNB’s 2% inflation target for as many as four months now, and will remain above this level for the remaining part of this year, it has to be realised that this is largely attributable to factors beyond the central bank’s control. Adjusted inflation is in the negative territory, and inflationary pressures caused by demand are non-existent and will not occur this year because of the expected development in household consumption.

The Czech currency is expected to appreciate against the euro by the end of this year. The Czech crown’s weakening since September 2011 is a reflection of the eurozone’s lower economic activity associated with the increasing risk aversion amongst investors, and weaker demand for Czech exports. A softer Czech crown helps to relax monetary conditions and has an invigorating effect on the country’s economy. Experience from 2008/2009 indicates that the CZK/EUR rate could be somewhere around its peak during this first quarter of this year. The last time that the Czech economy slumped into recession was in 4Q 2008, and the Czech crown hit the bottom in February 2009. Most recently, a q/q drop in GDP was registered in 3Q 2011. From the perspective of risk, for the coming period we cannot rule out another wave of the Czech currency’s weakening, in particular if risk aversion increases on financial markets; on the other hand, within a one-year horizon we foresee a risk stemming from a still stronger Czech currency.

obrazovka notebooku
Macroeconomic forecast 2011 2012 2013
GDP (growth in real terms, y/y in %) 1.7% 0.1% 1.3%
– Household consumption (growth in real terms, y/y in %) -0.5% -0.9% 1.2%
– Fixed investments (growth in real terms, y/y in %) -0.4% 1.3% -0.8%
External trade (CZKbn) 184.5 190.3 220.9
Industrial production (growth in real terms, y/y in %) 7.1% -1.6% 1.9%
Retail (growth in real terms, y/y in %) 2.0% -1.9% 1.4%
Wages (nominal growth, y/y v %) 2.3% 2.2% 2.8%
Unemployment (MPSV*, v %) 8.5% 8.9% 9.4%
Inflation (y/y in %) 1.9% 2.9% 1.6%
– Adjusted inflation (y/y in %) 0.0% -0.3% 1.6%
– Food prices (y/y in %) 4.6% 0.9% 1.2%
– Motor fuel prices (y/y in %) 9.8% 7.0% -2.0%
– Regulated prices and taxes (y/y in %) 4.7% 10.0% 2.1%
3M PRIBOR (average) 1.19% 1.17% 1.15%
2W Repo (average) 0.75% 0.75% 0.75%
EUR/CZK (average) 24.6 25.2 24.1

Source: KB