The Czech economy will grow at a rate of 2.5% in 2016 and accelerate to 2.7% in 2017. We expect the problems that have caused a slump in investments financed from the public purse to be resolved. The key issue in 2017 will be exiting from the FX floor regime.

  • In 2017, we expect investment activity to recover gradually.
  • The shortage of adequate workforce is becoming an impediment to higher growth.
  • In 2016 and 2017, wages will grow by more than 4%.
  • Households are not spending their increasing income on consumption only; their appetite for investments in the property market is growing as well. Property prices are quickly rising, also because almost no construction is taking place.
  • Inflation is returning. Next year, prices will grow by 2%, i.e. at the highest rate since 2012.
  • The end of the FX floor commitment will mean the end of the exchange rate stability. The CNB will nevertheless still seek to correct any major rate fluctuations on the market. And indeed, the end of the FX floor commitment does not mean the end of interventions.

The developments to date this year have confirmed our concerns that 2016 is marked by a slump in investments financed from the public purse. This is primarily related to the high statistical base from last year when the last of the European money allocated to the preceding programming period was being drawn. The Government’s lower capital expenditure has translated into a construction slump, mainly in the civil engineering sector. Weak investing has also been felt in industry. On the other hand, the industrial sector has profited from the automotive industry’s excellent performance. The gradually increasing drawdown on the EU funds allocated to the new programming period will bring investments back in 2017. However, the growth in investment activity will be moderate. Following this year’s 2.9% decline of investments we expect improvement by 4.3% next year. The recovery in construction will be weaker: following this year’s 8.2% drop, 2017 will see a growth of only 2%.

Economic growth will continue to improve the situation in the labour market. The record employment rate will continue to rise, but at a much slower pace. The low rate of unemployment is now also becoming a limit for companies’ investment decisions as ‘no people’ are available. The result is wages and salaries going up. Wage growth will exceed 4% this and next year. But households are not using their higher income for consumption only. They are transforming their larger savings into investments in the form of real estate. And the supply side also has a problem as virtually no construction is taking place. The result is price hikes on the property market, with the hikes already hitting double-digit values.

The recent low-inflation environment is a matter of the past. Before the end of this year, inflation will begin accelerating to 1% due to the year-on-year growth of fuel prices and also food prices to some extent. The 2% inflation target can even be reached in the early months of 2017. The surge in inflation will make it possible for the Czech National Bank to exit from its FX floor regime. We expect this move in the second quarter of 2017.

The end of the FX floor commitment will mean the end of the exchange rate stability. Despite the generally prevailing conviction that a significant appreciation of the Czech crown will follow, we see the risk primarily in a stronger exchange rate volatility causing the crown’s overshooting to either side. We recommend hedging against this volatility. The CNB will still seek to correct any major rate fluctuations in the market. Indeed, the end of the FX floor commitment does not mean the end of interventions. In the long run, a trend of an appreciating Czech crown should persist as the Czech economy converges with the euro area. However, the trend will be slower than before 2009.

Macroeconomic forecast 2015 2016 2017
GDP (real growth, yoy in %) 4.6 2.5 2.7
    Household consumption (real growth, yoy in %) 3.1 2.4 2.6
    Fixed investment (real growth, yoy in %) 9.1 -2.9 4.3
External trade (CZK bn) (*) 406 508 455
Industrial production (real growth, yoy) 4.6 4.0 4.2
Retail sales (real growth, yoy in %) 6.3 5.9 3.8
Wages (nominal growth, yoy in %) 2.7 4.1 4.3
Unemployment rate (MPSV, in %) 6.4 5.5 5.1
Inflation (yoy in %) 0.3 0.6 2.0
3M PRIBOR (average) 0.31 0.29 0.21
2W Repo (average) 0.05 0.05 0.05
EUR/CZK (average) 27.3 27.0 26.6

Source: Economic & Strategic Research, Komerční banka.

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