Prague, 15 May 2024 - The chief economists of the banks represented in the forecasting panel of the Czech Banking Association (CBA) expect the domestic economy to grow by 1.4% this year, slightly improving their estimate compared to the February forecast. For next year, the forecast expects GDP to accelerate by 2.7%, similar to the February forecast. The slightly more favourable growth estimate for this year is associated with a slightly better outlook for developments abroad. Average inflation will fall to 2.3% this year and should remain at a similar level next year. Nominal wages will rise by around 6% this year and by less than 4% in real terms, marking the first real wage growth after a two-year hiatus. The labour market has been affected only to a limited extent by last year's economic downturn, and the unemployment rate remains at low levels, although some signs of cooling in the labour market are already visible. CNB interest rates will continue to fall, with the CNB base rate expected to reach 4% this year and 3.5% next year. The koruna exchange rate has been revised towards weaker levels in the new forecast and should average around CZK 25 per euro this year and strengthen towards CZK 24.6 per euro next year.
Global uncertainty persists
The global economic development at the beginning of this year was slightly above expectations, but many indicators are still sending mixed signals and this year's recovery in global demand and foreign trade will largely depend on developments in China. The US economy continues to perform well, where more favourable macroeconomic numbers and a slower decline in inflation have led market participants to significantly reassess the pace of the US Federal Reserve's rate cut. While at the beginning of the year the market was convinced of a rapid rate cut, expectations have now changed to one or two rate cuts by the traditional "Thursday" by the end of this year. While developments in the euro area are not dazzling, at least the situation has stopped deteriorating in some respects and the economy grew slightly in the first quarter. The ECB is expected to start cutting rates in June, but how quickly it will cut rates by the end of the year is also a question for the market given the slower decline in core inflation. The manoeuvring room for the CNB will also influence the evolution of the major central bank rates;
Jakub Seidler, Chief Economist of the Czech Banking Association: "Developments abroad have shifted slightly in an optimistic direction in recent months, which cautiously improves the outlook for foreign demand and allows domestic economic growth to improve to 1.4% this year. However, growth can still be described as fragile, both in the context of developments in China, but also in Germany, which, like the domestic economy, faces a number of challenges with regard to the energy intensity of industry and structural changes in the automotive sector."
Cautious recovery of the domestic economy, which began at the end of last year, continues
The new CBA forecast for this year revised the domestic economy slightly upwards from 1.2% to 1.4%, which is in line with the estimates of the Ministry of Finance and the Czech National Bank. According to the preliminary GDP estimate for Q1 this year, the domestic economy grew by 0.5% quarter-on-quarter, continuing the cautious recovery that began in the last quarter of last year. The domestic economy should thus reach its pre-pandemic level of the end of 2019 in the second quarter of this year, i.e. after four and a half years. The forecast expects the quarter-on-quarter growth rate to accelerate slightly in the second half of the year and move above 2% on an annual basis. However, the recovery is still expected to be relatively slow, mainly due to a moderate recovery in household consumption and weak demand from abroad. The latter should start to improve in particular in the second half of the year. GDP growth is expected to reach 2.7% next year, close to the previous forecast in February;
Helena Horská, Chief Economist at Raiffeisenbank:"The Czech economy, now supported by a recovery in household consumption, exports and investment, is finally overcoming the pandemic downturn. In 2025, we expect a slight acceleration of growth thanks to the positive contribution of all key components, without being hampered by pandemic-era inventory drawdowns."
The forecast assumed that economic growth would be driven mainly by domestic demand. Household consumption should start to grow again, by 2.5%, after a decline in the previous two years. This is similar to the dynamics expected in the previous forecast, although household confidence started to develop more favourably at the beginning of the year, bringing a slight optimism of a faster recovery in household consumption due to the resumption of real wage growth. Real wages are expected to grow by less than 4% this year, but part of this increase will be muted by the effects of the consolidation package. We expect consumption to grow by 3% next year, which was the normal pace in the pre-pandemic days. Government consumption is expected to grow at around 1.5% this year, half the pace of the previous year. Investment will grow by 2.6% this year due to lower interest rates and the continued need to invest in energy conservation. However, the dispersion of estimates of individual forecasts for this year is significant. This is due, for example, to uncertainty about the take-off of investment in the real estate sector, which has been in decline in recent years due to high interest rates. The recent volatility in inventories, which should dampen growth this year due to the dissolution of previously built-up stocks, will be a significant uncertainty. Given the slightly more favourable turn in external demand, the estimate of export growth has been revised upwards from the February forecast. Despite the positive developments in the first months of this year, it is still the case that the strong contribution of the automotive sector to export growth last year will not be repeated this year, as confirmed by the latest March figures, which fell noticeably short of expectations.
Labour market starts to cool down slightly, but the share of unemployed persons will increase only slightly this year
The domestic labour market remains in good shape in the context of economic developments and the unemployment rate is the lowest in the EU. The overall share of unemployed persons reached 3.6% in 2023 and is expected to rise only slightly to 3.8% this year. However, this is still lower than what was observed in 2017, when the domestic labour market was already showing signs of overheating. While the domestic labor market remains in a state where many employers are struggling to find suitable employees, there are some signs of cooling in the last 2 quarters and this is confirmed by the latest labor market numbers, which fell short of expectations despite an above-average warm winter.
Nominal average wages will rise by 6% this year, and the growth rate should reach 5% next year. After two years, real wages will thus start to rise again, but given the fall in the past two years they will remain roughly at the 2018 level. Real wage growth should continue next year, but still at a relatively moderate pace of around 3%. According to the current outlook, real wages could reach their current peak of 2021 next year. The Q1 figure published at the beginning of June will be key to the outlook for wage growth. It will also be important for the market because it will confirm the more optimistic estimate of the central bank, which expects average wages to grow by 7.2% this year in its new spring forecast.
Average inflation this year and next year will be close to the CNB's 2% target
The faster decline in inflation at the start of this year led to a reassessment of annual average inflation from 2.6% to 2.3%, but the growth estimate for the rest of the year itself has not changed much and the new forecast still expects inflation to be slightly below 3% at the end of this year.The faster disinflation at the start of the year was largely due to a faster decline in food prices, which will, however, moderate their anti-inflationary effect in the coming months. The slow decline in services inflation also remains a risk, with prices still rising at around 5% y-o-y and month-on-month growth remaining above the long-term average of the pre-pandemic years. In addition, there are still risks associated with war in Ukraine or the Middle East that are difficult to assess. Nevertheless, the inflation estimate for next year is also at 2.3%, suggesting that some inflation risks remain.
Jan Bureš, chief economist at Patria Finance and economist at ČSOB:"Inflation in the Czech Republic fell significantly at the beginning of 2024 thanks to a significant year-on-year decrease in food prices. However, its positive effect will fade in the coming months and we expect inflation to be at higher levels near 2.8% by the end of the year thanks to inertia in services inflation."
CNB to continue cutting rates, main rate to fall to 4% by year-end
The Czech National Bank cut rates again in May by half a percentage point to 5.25%, but announced continued caution in easing monetary policy. This implies that rate cuts will continue this year, although the pace of interest rate cuts will slow in the second half of the year. Thus, the consensus fairly uniformly sees the CNB's main rate at the 4% threshold at the end of the year, and at 3.5% at the end of 2025. In this respect, the outlook for rates next year has shifted upwards, which is related to market expectations of slower rate cuts abroad. For the above reasons, domestic interest rates for longer maturities - especially for this year - have also been revised upwards in the new forecast. As a result, long average 10-year rates are falling more slowly and the consensus sees them still above 4% this year and at 3.75% next year.
The exchange rate of the koruna had been revised slightly towards weaker levels in the new forecast. The average value for this year should thus remain above CZK 25 per euro. At the end of this year, the forecast panel continues to estimate a strengthening of the koruna and an exchange rate of around CZK 24.8 per euro. The dispersion of the estimates of the individual forecasts is exceptionally narrow in this respect and none of the forecasts sees the koruna exchange rate above its current level at the end of this year. Next year, according to the forecast, the average exchange rate will appreciate by less than 2% to CZK 24.65 per euro, and then to CZK 24.4 per euro by the end of the year. Even in the case of the outlook for next year, none of the forecasts foresees a depreciation of the koruna above CZK 25 per euro.
The consolidation package brings this year's budget deficit to GDP below the desired threshold of 3%
The CBA forecast estimates the government deficit for this year at 2.7% of GDP, which will reduce the deficit by 1 percentage point compared to the previous year. The deficit for next year is estimated to be close to 2%, mainly as a result of the expected faster growth of the domestic economy. The debt-to-GDP ratio is expected to remain around 45% next year.
The mortgage market is developing differently at the beginning of the year
The mortgage market for the whole of 2023 has fallen by a quarter year-on-year, due to the effect of the still high benchmark base from the first half of 2022. The effect of the benchmark base in the first quarter of this year is working in the opposite direction, and the year-on-year growth in the volume of newly granted mortgages has reached 75%. According to the official statistics of the CNB, net new mortgages were granted in the amount of CZK 35 billion in the first quarter of this year, which is roughly the level of the same period in 2019. The average March rate for new mortgages was 5.29% according to the CNB, and 5.19% according to the CBA Hypomonitor.
By contrast, the volume of newly granted consumer loans in 2023 increased by 11% and exceeded CZK 100 billion for the first time. In the first quarter, the volume of new consumer loans reached new all-time highs and increased by a third year-on-year. The average March rate on new consumer loans stood at 8.93% and fell below the 9% mark for the first time since mid-2022.
New loans to businesses fell by a third year-on-year last year, with koruna loans falling by 38% and euro loans by 27%. In the first quarter of this year, the year-on-year decline continued at a slight 7% rate, with euro loans falling slightly more sharply. In the first quarter of the year, these slightly outweighed loans in koruna. The difference between the koruna and euro average rates narrowed to 1 percentage point in March this year, while it reached 6 p.p. in the second half of 2022, accelerating the transition of companies to euro loans. The share of new euro-denominated corporate lending in 2023 slightly exceeded the 50% mark for the first time (51.3%), while in 2022 it was 47.4% and the 2014-2021 average was around 30%.
Deposit growth continued in the first quarter of this year at a similar annual rate as in the whole of last year. In the case of households, it accelerated and exceeded 8%.Given that about a third of the growth in household deposits last year was accounted for by interest income, it can be expected that the year-on-year growth in deposits will slow down as the CNB interest rates fall;
The CBA macroeconomic forecast in figures:
|
Indicator
|
2023
|
2024
|
2025
|
|
|
|
|
|
Real GDP growth (%, yoy)
|
-0.2
|
1.4
|
2.7
|
|
Household consumption (%)
|
-3.1
|
2.5
|
3.2
|
|
Government consumption (%)
|
3.5
|
1.4
|
1.5
|
|
Investment (excluding inventories, %)
|
4.2
|
2.7
|
3.5
|
|
Export (%)
|
3.1
|
3.0
|
4.6
|
|
Import (%)
|
-0.4
|
2.2
|
4.5
|
|
Inflation: CPI (%) average
|
10.7
|
2.3
|
2.3
|
|
Inflation: CPI (%) end of year
|
6.9
|
2.8
|
2.3
|
|
Proportion of jobless persons (MLSA): average (%)
|
3.6
|
3.8
|
3.6
|
|
Average wage in nominal terms (growth in %)
|
7.5
|
6.0
|
5.1
|
|
Average real wage (%)
|
-2.9
|
3.7
|
2.7
|
|
Government deficit / surplus (% of GDP)
|
-3.7
|
-2.7
|
-2.2
|
|
Government debt (% of GDP)
|
44.0
|
44.8
|
45.0
|
|
CNB main rate 2week repo (%): end of period
|
6.75
|
4.00
|
3.50
|
|
3M-PRIBOR (%): average
|
7.12
|
5.00
|
3.70
|
|
10Y Czech goverment bond yield: average (%)
|
4.50
|
4.10
|
3.75
|
|
Basic ECB rate (%): end of period
|
4.50
|
3.75
|
2.75
|
|
EUR/CZK: average
|
24.00
|
25.06
|
24.65
|
|
EUR/CZK: end of year
|
24.70
|
24.80
|
24.43
|
|
Real GDP growth in the euro area (%)
|
0.5
|
0.5
|
1.4
|
|
Oil price (USD/barrel): BRENT average
|
82
|
85
|
80
|
|
Growth of bank loans to clients (%)
|
5.9
|
6.7
|
5.5
|
|
Growth of bank loans to households (%)
|
4.8
|
5.1
|
6.0
|
|
Growth of bank credits to (non-financial)
corporations (%)
|
4.7
|
8.9
|
7.3
|
|
Growth of bank clients' deposits, total (%)
|
7.9
|
7.4
|
5.7
|