MACROECONOMIC FORECAST OF THE CZECH REPUBLIC 3Q 24

8. 8. 2024
15 min. reading
August 2024: Growth of the domestic economy will be weaker this year, the optimistic expectations from the previous forecast have not been met
Prague, 8 August 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 0.9% year-on-year this year, lowering the estimate by half a percentage point compared to the May forecast. For next year, the forecast expects GDP to accelerate by 2.7%, similar to the May forecast. The slightly weaker growth estimate for this year is linked to the unfavourable outlook for external demand. Average inflation will fall to 2.3% this year and should remain at a similar level next year. Nominal wages will grow by less than 7% this year and by more than 4% in real terms, marking the first full-year increase in real wages after a two-year hiatus. Some signs of cooling in the labour market are already visible, although the weak economic developments have still had a relatively limited impact. Despite a slight increase, the unemployment rate remains at low levels. CNB interest rates will continue to fall and the CNB base rate should fall slightly below 4% this year and further towards 3.5% next year. The exchange rate of the koruna has been revised towards weaker levels in the new forecast and should average around CZK 25 per euro this year, while the koruna should strengthen towards CZK 24.7 per euro next year.

Global uncertainty persists
The global economy ultimately failed to meet expectations of a faster recovery in the first half of the year, and early forward-looking indicators from the beginning of the second half further dampened optimistic expectations. Although euro area growth itself finished slightly above expectations in the second quarter, developments were mixed and the German economy, important for domestic industry, disappointed and contracted quarter-on-quarter. In recent days, then, markets have become much more sensitive to weaker economic data from the United States, raising the stakes for a coming recession and a faster Fed rate cut. Expectations have thus returned to where they were at the start of the year, i.e. that US base rates could be cut by more than 1 percentage point by the end of this year. Thus, the market has been particularly sensitive to incoming macroeconomic data this year, which has brought about jumps in a number of market variables, including domestic interest rates. The escalation of geopolitical risks in the Middle East has so far not caused a more noticeable rise in commodity prices that could slow or completely disrupt the ongoing disinflationary process, but risks remain elevated, especially in the context of rising shipping prices.

Jakub Seidler, Chief Economist of the Czech Banking Association:
"Unfortunately, developments abroad did not meet the more favourable expectations of the latest forecast. The recovery of the German economy has stalled, fears of a recession in the US have risen again, and a number of risks remain regarding developments in China. According to leading indicators, the prospects for the second half of the year are not very optimistic either. All of this has led to a revision of domestic economic growth estimates back below 1%."

The domestic economy is growing only moderately this year
The CBA's new forecast for this year has revised downward the growth expectations for the domestic economy from 1.4% to 0.9%. According to the preliminary estimate of GDP for Q2 this year, the domestic economy grew by 0.3% quarter-on-quarter, continuing a very weak recovery that fell short of expectations from the previous forecast. Similarly, the revised GDP showed that the domestic economy grew by a marginal 0.2% in Q1, whereas the first preliminary estimate had suggested growth of 0.5%. Although the major revision of the national accounts at the end of June and some methodological refinements have already caused the economy to reach the pre-pandemic level of the last quarter of 2019 much earlier, in mid-2022, its growth is still among the weakest in the last 4 years compared to other EU countries. The forecast expects the quarter-on-quarter growth rate to accelerate slightly in the second half of the year, moving above 1% on an annualised basis. However, the recovery is still expected to be relatively slow, and developments in recent weeks bring further risks in the direction of weaker growth. GDP growth is expected to reach 2.7% next year, which was also the expectation in the May forecast. 

Petr Sklenář, Chief Economist at J&T Bank: 
"Growth in the Czech economy remained subdued in the first half of the year and was driven by a recovery in household consumer demand, as expected. We expect only a gradual improvement in the rest of the year, with full-year growth expected to be below 1%. Growth is not expected to accelerate to 2.7% until next year. Both domestic demand and better developments abroad should be behind the increase in the growth rate."

The forecast assumes that economic growth will be driven mainly by domestic demand, given renewed growth in real wages. Household consumption, after falling in the previous two years, should start to grow again, by 2.2% this year. This is only slightly weaker than expected in the previous forecast, as household confidence has started to decline slightly in recent months on the back of a less favourable economic outlook, which may reduce households' willingness to spend slightly. However, retail sales excluding automobiles rose by 4.1% yoy in the first half of the year, confirming that household consumption will be one of the main components of GDP growth. 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 by less than 3% this year; here the estimate has been revised up from the previous forecast on account of the data for the first quarter of this year. Investment will be flat this year, with limited growth this year linked to the EU funds cycle, a worse outlook for the economy and also lower corporate profitability. However, the dispersion of investment estimates of individual forecasts remains significant for this year. This is also related, for example, to uncertainty about the take-off of real estate sector investment, 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. The evolution of external demand did not confirm the expectations of a more robust recovery in the last forecast, which is why exports have been revised towards weaker growth this year. Despite the positive development in the first half of this year in terms of record car production, the strong contribution of the automotive sector to economic and export growth will not be repeated this year, with industrial production falling by 1.6% year-on-year in the first half of the year and car production by 1.8%. 

The labour market is starting to cool 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 countries. 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 labour market remains in a state where many employers are struggling to find suitable employees, there have been some signs of cooling over the past few quarters and the headline unemployment rate averaged 2.9% in the first half of the year, 0.3pp above the same period last year.

Nominal average wages will rise by 6.8% this year, with growth expected to reach 5% next year. Wage growth has been revised slightly upwards for this year on the back of more favourable developments in Q1 and a revision to the figures for the whole of 2023. Nominal wage growth reached 8% last year, one of the highest annual increases in the past two decades. However, compared to nominal wage developments in the Central European region, wage developments in the Czech Republic have lagged behind, not only in the last few years since the pandemic broke out, but also in terms of longer-term developments. After two years of declining real wages, real wages are expected to grow by 4.4% this year and by over 3% next year. Even so, the level of real wages will be roughly in line with 2018. Higher wage growth than expected in this forecast may then result from possible faster wage growth in the public sector.

Average inflation this year and next will be close to the CNB's 2% target
Inflation this year so far is in line with estimates, which is why the full-year estimate remains unchanged at 2.3%. However, the slightly weaker inflation in June brings slight downside risks, especially from the perspective of the summer months, when inflation may move below the CNB's 2% target in the short term. However, inflation is still expected to accelerate slightly towards the end of the year due to the effect of the lower benchmark base, and the consensus expects annual inflation to be 2.6% at the end of this year. The slow decline in inflation in services remains a risk, with prices still rising at around 5% year-on-year 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. Even so, the inflation estimate for this year and next remains close to the central bank's 2% target.

Jaromír Šindel, Citibank's chief economist:
"The outlook for a slower economic recovery and weakening inflation is sustained by expectations of a further decline in the CNB's two-week repo rate to 3.5% at the end of next year. However, a sizable majority of the consensus is leaning towards a slightly more significant decline in the CNB rate to 3%, which would be a more likely scenario if risks materialize and the Czech economy recovers more slowly."

CNB to Continue Cutting Rates, Main Rate to Fall Slightly Below 4% by Year-End
The Czech National Bank continued to cut interest rates in August, but slowed the pace of decline to a more traditional quarter-percentage point compared to previous monetary negotiations. The main rate thus fell to 4.5%. Although the central bank's own forecasts do not generally expect further rate cuts this year, the consensus of economists expects continued modest rate cuts of 25 basis points at each of the upcoming meetings for the rest of the year. This should bring the CNB's main rate to 3.75% by the end of the year. Next year, the consensus then expects only one more cut and the headline rate to end the year at 3.5%, but forecasts are mixed on this point and the average headline rate at the end of the year is 3.25%, meaning that some economists expect rates to fall slightly faster next year. However, none of the forecasts expect the CNB's main rate to be below 3% by the end of 2025.
 
The exchange rate of the koruna has been revised only very slightly towards weaker levels in the new forecast. The average value for this year should therefore 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 close to CZK 25 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, the average exchange rate is forecast to appreciate by less than 2% to CZK 24.7 per euro, and then to CZK 24.5 per euro by the end of the year. 

The government's debt has also decreased due to the revision of the national accounts, which increased the nominal level of GDP
The CBA forecast estimates the government deficit for this year at 2.7% of GDP, which will reduce the deficit by almost 1 p. The decline in the deficit this year is due to a combination of the unwinding of one-off expenditures related to compensations for high energy prices, a slight recovery of the domestic economy and the impact of the consolidation package. 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 has declined for this year, but this is also due to the GDP revision at the end of June, which raised the nominal level of GDP.

The credit market has been mixed at the start of the year, with household lending rising more strongly
In the first half of the year, mortgage lending grew 85% year-on-year. According to official CNB statistics, 89 billion CZK of new mortgages were actually granted in the first half of the year, which is the same volume as in the same period of 2018 and only 7 billion CZK below the level of the first half of 2020. However, data from the CBA Hypomonitor show that in terms of the number of mortgages granted, the first half of this year was still a quarter weaker than in 2020. The average rate for newly granted mortgages is slightly above the 5% mark, according to CNB statistics, which is in line with the CBA Hypomonitor data.

In the first half of the year, the volume of new consumer loans rose by almost a third to CZK 67 billion. The favourable development is due to the improving income situation of households, higher consumer confidence and also the need for higher financing due to inflationary developments in recent years. The average interest rate on consumer loans in June was 9.1%, half a percentage point lower than a year ago.

New lending to businesses rose by 5.4% in the first half of the year, including 4% for crown loans and 6.6% for euro loans. New lending to businesses was split equally between crown and euro loans in the first half of this year. The interest rate on koruna loans was 6.7% in June and was more than 2 percentage points lower than a year ago, while the interest rate on euro loans was 5.2% and has been declining only slowly (5.6% a year ago) given the evolution of euro interest rates. The share of new euro-denominated corporate loans in 2023 slightly exceeded the 50% mark for the first time (51.3%), while in 2022 it was 47.4% and the average for 2014-2021 was around 30%. 

Deposit growth slowed slightly in the second quarter of this year compared to the first quarter, from 8 to 7.3%. However, growth continued at 8.4% for households. Given that roughly one-third of the growth in household deposits last year was accounted for by interest income, the year-on-year growth in deposits can be expected to slow as the CNB interest rates fall. 

CBA Macroeconomic Forecast in Numbers:

2023

2024

2025

 

 

 

real GDP growth (%)

0.0

0.9

2.7

Growth of household consumption (%)

-2.9

2.2

3.0

Growth of government consumption (%)

3.5

2.7

1.5

Growth investment (excluding inventories, %)

2.7

0.0

3.3

Growth exports (%)

3.0

2.4

4.5

Growth of imports (%)

-0.6

1.5

4.5

inflation rate: CPI (%) average

10.7

2.3

2.2

Inflation rate: CPI (%) end of year

6.9

2.6

2.3

Podíl nezaměstnaných osob (MPSV): Average (%)

3.6

3.8

3.8

Average nominal wage (% growth)

8.0

6.8

5.4

Average Real Wage (%)

-2.4

4.4

3.1

Government Deficit/Surplus (% of GDP)

-3.5

-2.7

-2.3

Government Debt (% of GDP)

42.4

44.0

45.1

CNB 2T REPO base rate (%): end period

6.75

3.75

3.50

3M-PRIBOR (%): average

7.12

5.01

3.60

10-year government bond yield (%): average

4.50

4.01

3.83

ECB base rate (%): end of period

4.50

3.40

2.65

CZK/EUR exchange rate: average

24.00

25.08

24.66

CZK/EUR exchange rate: end of year

24.70

24.96

24.47

Real GDP growth in the Eurozone (%)

0.5

0.7

1.4

Oil prices (USD per barrel): brent average

82

83

80

Bank customer loan growth (%)

5.9

6.2

5.8

Household Bank Loan Growth (%)

4.8

5.1

5.8

Bank Loan Growth (Non-Financial) to businesses (%)

4.7

7.4

6.2

growth in customer bank deposits Total (%)

7.9

6.8

5.6

 

 

 

 
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