Macroeconomic Forecast - August 2023
Introduction and Summary
Global economic growth is slowing. While supply chains now function without any major problems, inflation remains high in many countries despite a gradual decline and continues to significantly reduce household purchasing power. Previous monetary tightening by central banks has also dampened economic activity.
According to the flash estimate of the Czech Statistical Office, real gross domestic product of the Czech Republic, adjusted for seasonal and calendar effects, increased by 0.1% QoQ and declined by 0.6% YoY in Q2 2023. In Q1 2023, for which detailed data on the structure of growth are available, GDP fell by 0.2% YoY (unadjusted).
Household consumption fell by 5.8% YoY in Q1. Consumer spending was negatively affected not only by the fall in real disposable income, caused by very high inflation, but also by the rise in the savings rate. General government consumption rose by 2.8% due to an increase in public sector employment and purchases of goods and services.
The decline in gross fixed capital formation deepened to 2.3%. Investment activity was boosted by investment in machinery and equipment, but other categories showed a decline, most notably investment in dwellings. From a sectoral perspective, the decline in investment by households and firms was cushioned by higher investment spending by the general government sector.
The change in inventories and valuables subtracted 0.5 pp from economic growth. Although firms continued to increase their inventories of production inputs sharply to avoid losses resulting from high inflation and possible shortfalls in component supplies, inventory accumulation declined year on year.
The foreign trade balance supported economic growth to the extent of 3.0 pp. While exports of goods and services increased by 7.6%, imports rose by only 3.9%. Improvements in supply chains enabled firms to complete work-in-progress production, which was subsequently exported. Imports were also dampened by weak domestic demand.
For 2023 as a whole, GDP could fall by 0.2% (after adjusting for calendar effects, it should be flat). Households continue to face the impact of high inflation this year, and their real consumption should fall further. Government consumption and gross fixed capital formation will be pro-growth, but weaker year-on-year inventory accumulation will slow the economy noticeably. The impact of generally weak domestic demand will be largely offset by the external trade balance. In 2024, the economic output could increase by 2.3%, mainly on the back of renewed growth in household consumption. However, economic activity will be slightly dampened by the effects of the consolidation package, which will at the same time moderate inflationary pressures.
High inflation slows economic growth and lowers living standards. Not only food, electricity and natural gas, but also other categories of goods and services are contributing significantly to the exceptionally strong rise in consumer prices. Strong domestic demand pressures are already being dampened by higher monetary policy rates. The appreciation of the koruna is also having an anti-inflationary effect. Annual inflation declined at a fast pace during the first half of this year and should remain in the high single-digit levels in the second half of the year. At the end of the year, the energy tariff will have a year-on-year base effect. The average inflation rate could thus reach 10.9% this year. Throughout 2024, annual consumer price inflation could already remain within the tolerance band of the Czech National Bank’s inflation target. In annual terms, we expect a decline of average inflation rate to 2.8%.
Labour market imbalances related to labour shortages continue to manifest themselves. As a result, despite the weak economic momentum, the unemployment rate should not increase much in 2023. From an average of 2.3% in 2022, it could rise to 2.8% this year and fall to an average of 2.7% next year. The persistent tightness in the labour market will push up wage growth, which will continue to lag behind inflation also this year, though. Average real wage growth should therefore not resume until 2024.
The current account of the balance of payments showed a deficit of 5.1% of GDP in Q1 2023, mainly reflecting a deterioration in the balance of primary income due to higher outflows of investment income (mainly in the form of dividends). The current account development was also negatively affected by a decline in the services surplus due to higher costs in the transport sector. Conversely, the unwinding of price pressures in industry and energy and the improvement in conditions in the export-oriented automotive industry led to a quarter-on-quarter improvement in the trade balance. Meanwhile, these factors should continue to be crucial. The current account deficit should thus gradually narrow to 1.7% of GDP this year and to 0.6% of GDP next year.
The estimate of the general government 2023 budget balance of −3.6% of GDP reflects extraordinary revenues and expenditures related to the energy crisis, rising mandatory social spending and continued assistance to Ukrainian refugees. The fiscal policy stance is expected to lead to a structural balance of −2.3% of GDP and a rise in debt to 44.7% of GDP.
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2023 | 2024 | ||
|---|---|---|---|---|---|---|---|---|---|---|
| Current forecast | Previous forecast | |||||||||
| Nominal GDP | bill. CZK | 5 411 | 5 791 | 5 709 | 6 109 | 6 786 | 7 384 | 7 751 | 7 475 | 7 989 |
| nominal growth in % | 5,9 | 7,0 | -1,4 | 7,0 | 11,1 | 8,8 | 5,0 | 10,0 | 6,9 | |
| Gross domestic product | real growth in % | 3,2 | 3,0 | -5,5 | 3,6 | 2,4 | -0,2 | 2,3 | 0,1 | 3,0 |
| Consumption of households | real growth in % | 3,5 | 2,7 | -7,2 | 4,1 | -0,7 | -3,4 | 3,9 | -2,7 | 3,9 |
| Consumption of government | real growth in % | 3,9 | 2,5 | 4,2 | 1,4 | 0,6 | 2,4 | 1,8 | 1,6 | 1,3 |
| Gross fixed capital formation | real growth in % | 10,0 | 5,9 | -6,0 | 0,8 | 3,0 | 0,8 | 0,7 | 2,8 | 0,5 |
| Contribution of net exports | pp | -1,2 | 0,0 | -0,4 | -3,6 | 0,9 | 2,4 | 1,3 | 0,8 | 1,4 |
| Contrib. of change in inventories | pp | -0,5 | -0,3 | -0,9 | 4,8 | 0,9 | -1,7 | -1,3 | -0,5 | -0,7 |
| GDP deflator | growth in % | 2,6 | 3,9 | 4,3 | 3,3 | 8,5 | 9,0 | 2,6 | 9,9 | 3,8 |
| Average inflation rate | % | 2,1 | 2,8 | 3,2 | 3,8 | 15,1 | 10,9 | 2,8 | 10,9 | 2,4 |
| Employment (LFS) | growth in % | 1,4 | 0,2 | -1,3 | -0,4 | -0,8 | 1,0 | 0,7 | -0,2 | 0,6 |
| Unemployment rate (LFS) | average in % | 2,2 | 2,0 | 2,6 | 2,8 | 2,3 | 2,8 | 2,7 | 3,0 | 2,8 |
| Wage bill (domestic concept) | growth in % | 9,6 | 7,8 | 0,1 | 5,9 | 9,3 | 8,4 | 6,1 | 7,5 | 5,8 |
| Current account balance | % of GDP | 0,4 | 0,3 | 2,0 | -2,8 | -6,1 | -1,7 | -0,6 | -3,5 | -1,9 |
| General government balance | % of GDP | 0,9 | 0,3 | -5,8 | -5,1 | -3,2 | -3,6 | . | -3,5 | -2,9 |
| General government debt | % of GDP | 32,1 | 30,0 | 37,7 | 42,0 | 44,2 | 44,7 | . | 43,5 | 44,0 |
| Assumptions: | ||||||||||
| Exchange rate CZK/EUR | 25,6 | 25,7 | 26,4 | 25,6 | 24,6 | 23,8 | 23,9 | 23,8 | 23,8 | |
| Long-term interest rates | % p.a. | 2,0 | 1,5 | 1,1 | 1,9 | 4,3 | 4,3 | 3,9 | 4,5 | 4,0 |
| Crude oil Brent | USD/barrel | 71 | 64 | 42 | 71 | 101 | 80 | 77 | 77 | 73 |
| GDP in the euro area | real growth in % | 1,8 | 1,6 | -6,2 | 5,4 | 3,4 | 0,7 | 1,2 | 0,7 | 1,3 |
Tables and Graphs
Preparation of the Macroeconomic Forecasts
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Updated: 18.08.2023
Information
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The Macroeconomic Forecast is prepared by the Economic Policy Department of the Czech Ministry of Finance. It contains a forecast for the years 2023 and 2024, and for certain indicators an outlook for the 2 following years (i.e. until 2026). It is published on a quarterly basis (in January, April, August and November).
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Any comments or suggestions that would help us improve the quality of our publication and closer satisfy the needs of its users are welcome. Please send any comments to the following email address: macroeconomic.forecast(at)mfcr.cz
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Cut-off Date for Data Sources: The Macroeconomic Forecast is based on data known as of 10 August 2023.