MACROECONOMIC FORECAST OF THE CZECH REPUBLIC 1Q 25
February 2025: the CBA worsened the economic outlook
Prague, 20 February 2025 - The chief economists of the banks represented in the forecasting panel of the Czech Banking Association (CBA) expect the domestic economy to grow by 2.1% this year and to accelerate further to 2.4% in 2026. This should follow a 1% economic recovery last year. However, the outlook for this year and next is two tenths of a percentage point weaker than in the November forecast. Uncertainty about the onset of trade wars weighs heavily on the outlook. According to our survey, two-thirds of panellists did not include these in their baseline forecasts. If they had done so, economic growth this year and next could have fallen by around 0.3% points a year, to 1.8% and 2.1% respectively. However, this cannot be considered a noticeable cooling of the Czech economy that would have significant implications. In the baseline scenario, we expect consumer price growth of 2.4% yoy this year similar to last year and only a slight slowdown to 2.2% in 2026. Nominal wage growth will moderate by more than one percentage point this year to 5.8% and further to 5% next year, which may still be a slightly inflationary figure. Real wages will grow by 3.3% and 2.7% in the years of our forecast, following 4.4% growth last year. The deterioration in the labour market reflects a weaker economic recovery, but we expect the unemployment rate to stabilise rather than rise significantly. CNB interest rates are likely to continue to fall gradually, with the two-week repo rate expected to reach 3.25% this year and 3% next year. This outlook has not changed since November, as weaker economic recovery has been offset by stronger inflation. The exchange rate of the koruna is expected to settle below CZK 25 per euro by the end of this year and to appreciate further to 24.6 by the end of next year.
Global uncertainty persists
The outlook for a recovery in the euro area economy after 0.7% annual growth last year remains fragile. We forecast a gradual recovery of 1% and 1.2% y/y in its economy this year and next, respectively, which is 0.1-0.2% points weaker than in the previous outlook. This mainly reflects the weaker outlook for industrial and export-oriented economies, especially Germany, whose economy is still expected to experience a weaker recovery than the euro area average, according to consensus, due to structural challenges and political uncertainty. This is likely to result in a somewhat stronger ECB interest rate cut than the autumn forecast. The ECB's refinancing rate should already reach 2.15% and the deposit rate 2% later this year. Both will thus fall by three quarters of a percentage point compared with the current rates of 2.90% and 2.75%. The trade wars in the US, EU and China economic triangle pose a downside risk to the eurozone recovery, especially for export-oriented Germany. A trade war between the US and China would likely bring a further disinflationary shock in the foreseeable future from the additional reallocation of Chinese export flows from the US market to the European market.
Pavel Sobíšek, Chief Economist, UniCredit Bank:
"There is a broad consensus among CBA members that the Czech economy should continue to accelerate its annual growth. It is likely to exceed 2% this year and could approach 2.5% next year. A necessary condition for such a development is that no large-scale trade wars break out in the world."
Vulnerable Czech recovery amid still resilient domestic consumption
The forecast suggests slightly weaker economic activity in 2025 and 2026, but wage growth and low inflation should support domestic demand. Real GDP growth accelerates to 1% yoy in 2024. We expect a further acceleration to 2.1% in 2025, but weaker than the previous forecast (2.3%). A similar downgrade to 2.4% has been made for 2026. Household consumption is likely to have grown by 1.7% y/y in 2024 and we expect it to accelerate further, by around 1% points, to 2.6% and 2.7% this year and next. Government consumption growth has been revised up slightly to 3.5% for 2024 (due to the floods and the state budget review), resulting in a slowdown to 1.5% in 2025.
Fixed investment (i.e. investment excluding inventories) probably fell by 0.3% last year (vs. the previously expected 0.7% growth), and we expect weaker growth of 1.9% in 2025 as well, instead of the previous 2.6%. Weaker growth has been driven by flagging industrial activity and uncertainty related to both trade wars and structural changes in the European economy (energy crisis, Chinese competition). 2026 should bring stronger 3% fixed investment growth due to a combination of stronger EU fund inflows, government investment, a recovery in the housing market, lower interest rates and the need to deal with structural changes.
Source:CZSO, LSEG, CBA forecast
Despite the weaker recovery in external demand, we expect stronger export growth of 3.2% and 3.8% yoy this year and next, following last year's 1.6% increase. Exports outside the euro area and the EU, as well as a recovery in domestic demand in Europe, are supporting factors for export activity. This has helped the Czech economy to mitigate the negative effects from the weak German economy. The outlook foresees slightly stronger growth in imports compared to exports, reflecting their moderate increase last year, as well as a stronger recovery in domestic demand, both consumption and investment.
Source:CZSO, LSEG, CBA forecast
Slight cooling of the labour market, but this year's unemployment will rise rather slightly
The postponement of a stronger recovery in the Czech economy, due to worse industrial production figures, has negatively affected the labour market. The share of unemployed rose to around 4% (seasonally adjusted) at the end of last year, which was higher than expected in the autumn months. We reflect this in our expectation of a higher 4.1% share of the unemployed this year, followed, however, by a slight decline to 4% in 2026. The labour market will thus not relax much thanks to the gradual recovery of the Czech economy. We expect a continued divergence in labour market demand, with other sectors still able to compensate for declining industrial employment. Even if the downside risks associated with trade wars are realised, we do not expect a very visible easing of the labour market that would noticeably affect the expected recovery in household consumption. Rather, this alternative scenario would likely lead to a further modest rise in the unemployment rate this year, as it would be associated with still solid, albeit weaker, economic growth of 1.8% and 2.1% yoy this year and next.
Jan Bureš, Chief Economist, Patria Finance:
"The unemployment rate should not rise significantly from current levels. However, the risk for the labour market is a prolonged decline in export-oriented industry, which the rest of the economy - especially the service sector and the state - would no longer be able to compensate for by creating new jobs.
Real average wages will reach their pre-Covidian level during 2026
Nominal average wage growth will slow to 5.8% this year from almost 7% last year, and will settle at 5% growth in 2026. Nominal wage growth in the second half of last year was a positive surprise compared to our November forecast. The updated wage outlook and stabilizing inflation will lead to a slight slowdown in real wage growth this year and next, averaging about 3% y/y after last year's 4.4% increase. Thus, according to the current outlook, real wages will return to their pre-forecast level of 2019 only during the course of next year and will not surpass their 2021 peak until 2027 at the earliest.
Source:CZSO, LSEG, CBA forecast
Average consumer price inflation to remain slightly above the centre of the inflation target
After two years of double-digit inflation, when prices rose cumulatively by over 27%, inflation slowed noticeably to 2.4% yoy last year. However, consumer price inflation will continue to rise towards the mid-point of the CNB's inflation target from above in 2025. We expect inflation this year to be on average the same as in 2024, i.e. a further annual increase of 2.4%, and only a slight slowdown to 2.2% in 2026. We expect a modest impact in both years (+0.1% points due to higher indirect taxes). Although we expect only a slight change in the rate of consumer price growth, the structure of annual growth will change more. Food will be a bigger driver in the first half of the year (more due to the base effect, but food also rose in January itself) than energy. Within core inflation, there is a gradual slowdown in services but an acceleration in rents, including imputed rents, with both components reflecting the strengthening mortgage and property markets. Structural changes linked to geopolitical developments and climate change continue to pose a risk of stronger consumer price growth, which may, on the other hand, offset the disinflationary impact of possible trade wars between the US and China, probably in the short term.
Source:CZSO, LSEG, CBA forecast
Jaromír Šindel, Chief Economist of the Czech Banking Association:
"The Czech koruna continues to strengthen slightly in our outlook, which mainly reflects the persistently positive interest rate differential. This reflects ongoing inflationary pressures, as well as the gradual recovery of the Czech economy, which limits the dovish mood at the CNB. Trade wars pose a downside risk to the koruna, which is likely to be partly offset by US pressure to end Russian aggression in Ukraine."
The CNB will cut its interest rates by half a percentage point this year
The CNB's interest rates are likely to continue to decline gradually this year, with its base rate reaching 3.25% and moving further towards 3% next year from the current 3.75%. Risks are skewed to the upside, however, due to the expected continued economic recovery, the associated pressure in the labour market, as well as the property and mortgage markets and risks associated with the inflation outlook. This is also reflected in the panelists' forecasts, the average of which is 0.15% points above the median forecast. Moreover, if we look at the deviations from the forecasts, the CBA panel points to a variance from the median forecast of -0.25/+0.5% points in 2025, which becomes more asymmetric in 2026 with a 0/+0.5% point spread. Further, the details of the deviations in the panelists' forecasts point to a combination of a more hawkish outlook with expectations of a stronger outlook for the economy, and thus stronger wage and consumer price growth relative to consensus. At the same time, the asymmetric risks associated with the outlook for the CNB interest rate reflect the Bank Board's continued hawkish rhetoric towards both the CNB forecast and the neutral interest rate. This may represent a limit to a rate cut below its neutral level, which in the Board's view is around 3.5%.
The exchange rate of the koruna is expected to settle below CZK 25 per euro by the end of this year and to add further appreciation to 24.6 at the end of next year. The outlook for the koruna still reflects, albeit less so, the positive outlook for the interest rate differential between the CNB and the ECB. Although this differential has widened by a quarter percentage point on the one- and two-year horizons compared with the November forecast, our outlook for the koruna envisages around three-quarters of a percentage point less appreciation compared with the previous forecast. This is consistent with a weaker export outlook, but also with a stronger US dollar due to the higher outlook for US interest rates. Taking into account the panel's predicted relationship between the koruna and the CNB interest rate, we do not expect the koruna to have a very strong effect on the CNB interest rate on average. Rather, we expect the effect to be in the opposite direction, i.e. that the prospect of a higher CNB interest rate compared to the ECB will be reflected in a stronger koruna. This also fits into the context of the perception of upside risks to inflation, which are mainly linked to domestic demand. The dispersion of the outlook on EURCZK for end-2026 remains as usual considerable between 24 and 25.3, reflecting the diverging outlook on the interest rate differential.
Source:CNB, CBA forecast
Consolidation package brings the budget deficit to GDP further below the desired 3% threshold
The government deficit improved by about one percentage point last year to -2.8% of GDP, only slightly worse than previous expectations (-2.7%). We expect a further slight improvement to -2.4% this year and further to -2.2% of GDP in 2026. This slight improvement reflects the natural reality of the political cycle, which will culminate in the upcoming autumn elections to the Chamber of Deputies. NATO's debated increased demands for military spending and municipal co-financing of European investments pose risks to the outlook for public finances. In contrast, we expect a more moderate increase in government debt to 44.3% of GDP during 2025 and 2026, 0.3% point lower than our November forecast. Debt levels remain significantly lower than in neighbouring countries, with the European Commission projecting government debt levels of around 62% of GDP for Slovakia, Poland and Germany, around 74% for Hungary and 90% for the euro area in 2026.
The credit market strengthened last year
Growth in bank lending to households is expected to strengthen slightly to 6% this year and next, after almost 5% growth this year, while lending to businesses is expected to slow slightly by more than 1% point after 7.6% growth last year. This year, we expect deposits to grow more moderately at around 6% after nearly 7.5% growth last year. Last year's data confirmed a strengthening recovery in the mortgage market, with year-on-year growth in new mortgage volume (excluding refinancing) reaching 90% to CZK 212bn. Also, data from the CBA Hypomonitor suggest a continued recovery of the mortgage market in early 2025. This primarily reflects a further, albeit more modest, decline in mortgage rates, a fall in deposit rates, expected house price growth and a recovery in real household incomes. Adding to the stronger mortgage market is the accelerating pace of growth in new consumer lending, which rose by 30% year-on-year to C135 billion in 2024. New loans to non-financial corporates (excluding refinancing) in particular strengthened at the end of last year (thanks to euro loans), rising by 24% on average after falling by almost a third in 2023. The share of euro loans in total new loans to non-financial corporations fell slightly to 49% in 2024 from almost 52% in 2023.
The CBA macroeconomic forecast in figures:
|
Ukazatel |
2024 |
2025 |
2026 |
|
vs. předchozí výhled |
||
|
|
|
|
|
2024 |
2025 |
2026 |
|
|
Růst reálného HDP (%) |
1,0 |
2,1 |
2,4 |
|
(0) |
(-0,2) |
(-0,2) |
|
Růst
spotřeby domácností (%) |
1,7 |
2,6 |
2,7 |
|
(-0,1) |
(-0,1) |
(-0,1) |
|
Růst
vládní spotřeby (%) |
3,5 |
1,5 |
1,2 |
|
(0,2) |
(-0,2) |
(0) |
|
Růst
investic (bez zásob, %) |
-0,3 |
1,9 |
3,0 |
|
(-1) |
(-0,7) |
(0) |
|
Růst
vývozů (%) |
1,6 |
3,2 |
3,8 |
|
(0,3) |
(-0,3) |
(-0,2) |
|
Růst
dovozů (%) |
0,8 |
3,5 |
3,9 |
|
(0,8) |
(-0,5) |
(-0,1) |
|
Míra inflace: CPI (%) průměr |
2,4 |
2,4 |
2,2 |
|
(0) |
(-0,1) |
(0,1) |
|
Míra inflace: CPI (%) konec roku |
3,0 |
2,4 |
2,2 |
|
(-0,1) |
(0,4) |
(-0,1) |
|
Podíl nezaměstnaných osob (MPSV):
průměr (%) |
3,8 |
4,1 |
4,0 |
|
(0) |
(0,2) |
(0,2) |
|
Průměrná nominální mzda (růst v %) |
6,9 |
5,8 |
5,0 |
|
(0,3) |
(0) |
(0) |
|
Průměrná reálná mzda (%) |
4,4 |
3,3 |
2,7 |
|
(0,3) |
(0,1) |
(-0,1) |
|
Vládní deficit/přebytek (% HDP) |
-2,8 |
-2,4 |
-2,2 |
|
(-0,1) |
(-0,1) |
(-0,2) |
|
Vládní dluh (% HDP) |
43,4 |
44,2 |
44,3 |
|
(-0,1) |
(0,1) |
(-0,3) |
|
Základní sazba ČNB 2T REPO (%): konec
období |
4,00 |
3,25 |
3,00 |
|
(0) |
(0) |
(0) |
|
3M-PRIBOR (%): průměr |
5,0 |
3,6 |
3,3 |
|
(0) |
(0) |
(0) |
|
Výnos 10letého vládního dluhopisu
(%): průměr |
4,0 |
4,0 |
3,9 |
|
(0) |
(0,1) |
(0,2) |
|
Základní sazba ECB (%): konec období |
3,15 |
2,15 |
2,15 |
|
(0) |
(-0,25) |
(-0,18) |
|
Kurz CZK/EUR: průměr |
25,1 |
25,1 |
24,7 |
|
(0) |
(0,2) |
(0,2) |
|
Kurz CZK/EUR: konec roku |
25,2 |
24,9 |
24,6 |
|
(0) |
(0,2) |
(0,2) |
|
Růst reálného HDP v eurozóně (%) |
0,7 |
1,0 |
1,2 |
|
(0) |
(-0,1) |
(-0,2) |
|
Ceny ropy (USD za barel): brent
průměr |
80 |
75 |
73 |
|
(-2,2) |
(0) |
(0) |
|
Růst bankovních úvěrů klientských (%) |
6,1 |
5,7 |
5,8 |
|
(-0,1) |
(0) |
(0) |
|
Růst bankovních úvěrů domácnostem (%) |
4,9 |
5,9 |
6,1 |
|
(0) |
(0,3) |
(0) |
|
Růst bankovních úvěrů (nefinančním)
podnikům (%) |
7,6 |
5,4 |
6,1 |
|
(0,2) |
(0) |
(0) |
|
Růst bankovních vkladů klientských
celkem (%) |
7,4 |
5,9 |
5,0 |
|
(0) |
(0,2) |
(0) |