Macroeconomic Forecast - July 2016

• Macroeconomic Forecast - July 2016PDF (941kB)

Summary of the Forecast

The Czech economy continues to be in a very good shape. As expected, YoY growth of the economy slowed down in the first quarter of 2016, after the one-off effect of European grants wore off. However, this slowdown was less intensive than we had estimated in the previous forecast. In comparison with the same period of 2015, real GDP increased by 2.7%, QoQ growth (seasonally adjusted) reached 0.4%.

The fastest growing component of domestic demand was private consumption (growth of 2.6%), which reflects improving income situation of households under the conditions of nearly negligible inflation. Government consumption growth reached 2.5%. Investment in fixed capital decreased slightly (by 0.1%), as the high comparison base of the extraordinarily successful year 2015 was reflected here.

In contrast, the balance of foreign trade had a favourable influence on GDP growth. Though export growth slowed down considerably, similar change in dynamics was also seen on the side of imports. In addition to the slowdown of export growth, the development of investments, which also have high import content, contributed to this result.

Real gross value added increased by 2.4% YoY in the first quarter of 2016. The contribution of manufacturing was crucial; high growth was also seen in trade and transportation.

According to the last known figure of June 2016, consumer prices increased only by 0.1% YoY. Low inflation is mainly caused by a deep decline in prices of imported goods, mainly mineral fuels, and generally low inflation on the global scale, which predominates over not yet fully apparent demand pressures. This situation helps the growth of real disposable income of households and subsequently also their consumption.

On the labour market, the economic boom is reflected in the dynamic development of all important indicators. The YoY employment growth of 2.0% in the first quarter of 2016 was the highest since the end of 2007. A positive feature is also an increase in the participation rate. Seasonally adjusted unemployment rate (LFS), which has been reaching the lowest level in the whole EU since the beginning of 2016, decreased further to 4.0% in May 2016. Low unemployment and mismatches between supply and demand for labour are already starting to be reflected in the acceleration of wage growth, which is not fully in accordance with the decreasing growth of labour productivity.

The current account of the balance of payments has been recording an increasing surplus since 2014. In the first quarter of 2016, it reached 1.4% of GDP (in annual terms), and was thus the highest in the history of the independent Czech Republic. The surpluses of the balance of goods and services are thus already apparently exceeding the primary income deficit, which is largely influenced by the outflow of income from foreign direct investment in the form of dividends and reinvested earnings.

In the upcoming second half of 2016 and in 2017, however, it is possible to expect a little bit less optimistic outlook.

The result of the referendum on the United Kingdom’s withdrawal from the EU considerably increased uncertainties in the European economies as well as on the global scale. Even though no relevant information on the time progress and the method of negotiations on the membership termination were available as of the cut-off date of the Forecast, the decrease in economic sentiment is a reason for decreasing the growth forecasts in the economies probably affected, directly or indirectly, by the UK withdrawal from the EU, including the Czech economy.

The prices of crude oil and mineral fuels still remain at levels that are considerably lower than the levels common in previous years. In the following period, however, a tendency for their gradual slight growth should probably prevail, and it is thus possible to expect that this positive supply shock will end in the near future.

As far as expenditure breakdown of GDP is concerned, the most problematic factor seems to be the dynamics of investments. Private investments are unlikely to outweigh the slump in the general government’s gross fixed capital formation, as higher base (of the year 2015) for comparison, lower growth of gross operating surplus, ongoing slowdown in the growth of loans to non-financial corporations or an increase in external risks will weigh on their growth.

Assessment of the aforementioned facts results in the correction of the forecast of real GDP growth from 2.5% to 2.2% for 2016 and from 2.6% to 2.4% for 2017.

The forecast of inflation rate in 2016 has been revised slightly downwards from 0.6% to 0.5%. The forecast for 2017, when the inflation rate should reach 1.2%, was also adjusted in the same direction and to a similar extent. The resumption of growth of consumer prices should thus be more gradual and the return to the CNB’s inflation target slower.

Favourable situation on the labour market results in a further decrease in the unemployment rate (LFS) forecast for 2016 (from 4.4% to 4.1%) as well as for 2017 (from 4.3% to 4.0%).

The forecast for the surplus on the current account of the balance of payments, which should reach 1.5% of GDP in 2016 instead of the previously expected 1.1% of GDP, has also improved. For 2017, the forecast of the balance of the current account was increased from 1.0% of GDP to 1.2% of GDP. Thus, the Czech economy is probably becoming one of the countries with a structural surplus in foreign relations.

From the perspective of expected tax revenues it is possible to state that the sum of changes in the forecast of the most important tax bases is more or less neutral. Changes in the positive (i.e. higher dynamics of the nominal wage bill) and negative (slower growth of the nominal consumption of households and net operating surplus) directions are roughly offsetting each other.

Independent expert evaluation of the macroeconomic framework

In accordance with the Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States, macroeconomic forecast used for budgetary planning should be ex ante evaluated by a government-independent institution. The implementation of this directive is carried out by the laws on budgetary discipline which have not been ratified by the Chamber of Deputies yet.

Consequently, the July Macroeconomic Forecast of the MoF was evaluated by experts from government-independent institutions. These institutions were asked to evaluate the estimated future development of the Czech economy on the scale conservative–realistic–optimistic.

There were 19 independent institutions addressed (macroeconomic departments in banks and insurance companies, academic workplaces of universities, deputies of employers and employees), 11 of which responded (Akcenta CZ; Cyrrus; Česká spořitelna; Czech National Bank; ČSOB; Czech Chamber of Commerce; ING Bank N.V.; Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague; Komerční banka, Raiffeisenbank; UniCredit Bank Czech Republic and Slovakia). Scenario of the July Macroeconomic Forecast has been evaluated as realistic by 8 institutions, as realistic to conservative by 2 institutions and as conservative by one institution. The scenario can be therefore considered as realistic and it can be used to formulate the macroeconomic framework of the State Budget in compliance with Article 4 of the Council Directive 2011/85/EU.

Tables and Graphs

• Tables and Graphs - July 2016XLSX (1964kB)

Preparation of the Macroeconomic Forecast

• Preparation of the Macroeconomic Forecast – a Look under the Hood - July 2013PDF (91kB)
   

Updated: 25.07.2013

Evaluation of Forecasting History at the Ministry of Finance

• Macroeconomic Forecasts at the MoF - A Look into the Rear view Mirror - July 2013PDF (184kB)
• AnalytIQ tools to assess the MoF forecasts accuracy and much more - July 2016ZIP (308kB)
   

To run, the application requires Microsoft Excel 2010 or Microsoft Excel 2007. Macros need to be enabled.
Updated: 29.07.2016

Information

• The Macroeconomic Forecast is prepared by the Economic Policy Department (as of 1 January 2016, Financial Policy Department was renamed to Economic Policy Department) of the Czech Ministry of Finance on a quarterly basis. It contains a forecast for the current and the following year (i.e. until 2017) and for certain indicators an outlook for another 2 years (i.e. until 2019). As a rule, it is published in the second half of the first month of each quarter.
• Any comments or suggestions that would help us to improve the quality of our publication and closer satisfy the needs of its users are welcome. Please direct any comments to the following email address: macroeconomic.forecast(at)mfcr.cz
• Cut-off Date for Data Sources:
  The forecast was made on the basis of data known as of 13 July 2016.