Czech economic growth will return to the ‘normal’ level of around 2.6% this year. Last year’s growth of real GDP by approximately 4.5% was an extreme development attributable to the coincidence of several factors that will not recur. In spite of that, this year the Czech economy will grow faster on average than the economy of the euro area as a whole. Thus, the process of catching up with the standard of living in our Western European neighbours will continue for the third year in a row.

Last year’s growth was the fastest since 2007 and resulted in the highest ever level of per capita GDP. Thus, 2016 marks the end of the crisis developments in preceding years. Last year’s rocket-speed growth was occasioned by a combination of several favourable factors: (1) At the very last minute, the Czech cabinet was able to unplug the ‘money pipelines’ from the EU and tap almost the maximum possible amount from the funds slated for the 2007-2013 programming period. (2) Thanks to the significant drop in oil prices, and therefore also fuel prices, in particular households but also businesses were left with more money for other spending. (3) The changed rules for tobacco product taxation helped last year’s result at the expense of the 2014 result. The current fall of fuel prices is creating an environment for another positive impetus, which should be visible during the first half of this year. The new programming period will bring only slightly less funds for the whole period from 2014 to 2020 than the preceding period, but we expect a slower rise-up curve. On the whole, we expect this year’s economic growth at 2.6%.

The growth in economic activities is spread evenly and is visible in all sectors of the country’s economy. It is robust, and therefore improvements in the labour market are apparent. The rate of employment has hit the all-time high while unemployment is attacking the lowest level since 2007, and even a level that is beginning to reflect in stronger wage pressures. Nominal wages will grow by more than 3.5% this year. The growth in employment, wages and overall consumer confidence will mean that their spending appetite will not leave Czech households this year.

Due to cheap fuels and food, last year’s inflation was the lowest since 2003. It is because of the significant downward revision of the outlook for commodities that we have also revised our Czech inflation outlook downward. Compared with this year’s expected inflation of 1.6% in our preceding forecast we currently predict it at 0.9% on average. Nevertheless, inflation will be climbing up fast this year: from the current near-zero values to the 2% target at the end of 2016.

We will not see the exit from the intervention regime this year either. We have moved the exit time to Q1 2017.The inflation outlook revised downwards and the ECB’s continued QE have prompted us to move the timing. In addition, a visible change can be seen in central bankers’ rhetoric in favour of a later time for the exit. And it appears that the political pressures on the CNB Board members have subsided. Not even Mr Miloš Zeman, President of the Czech Republic, is strictly insisting on an immediate end to the intervention regime. The good news therefore is that ultimately, the technical aspect may prevail over the political aspect.

Macroeconomic forecast 2014 2015 2016
GDP (real growth, yoy in %) 2.0 4.5 2.6
    Household consumption (real growth, yoy in %) 1.5 2.9 2.7
    Fixed investment (real growth, yoy in %) 2.0 7.9 0.9
External trade (CZK bn) (*) 429 442 446
Industrial production (real growth, yoy) 5.0 4.6 5.6
Retail sales (real growth, yoy in %) 2.9 5.8 4.3
Wages (nominal growth, yoy in %) 2.3 3.3 3.6
Unemployment rate (MPSV, in %) 7.6 6.4 5.4
Inflation (yoy in %) 0.4 0.3 0.9
    Taxes (contribution to yoy CPI) 0.1 0.2 0.1
    Adjusted inflation (yoy in %) (**) 0.7 1.3 1.5
    Food prices (yoy in %) (**) 2.0 -1.1 0.8
    Fuel prices (yoy in %) (**) 0.1 -13.3 -4.7
    Regulated prices (yoy in %) (**) -3.0 0.2 -0.5
3M PRIBOR (average) 0.36 0.31 0.29
2W Repo (average) 0.05 0.05 0.05
EUR/CZK (average) 27.53 27.28 27.02

Source: Economic & Strategic Research, Komerční banka.

Note: (*) external trade as per cross-border statistics; (**) inflation components net of primary impact of tax changes