Macroeconomic Forecast - November 2023
Introduction and Summary
The Czech economy is teetering on the edge of recession this year. Gross domestic product is likely to fall by 0.5% in 2023 but is forecast to grow by 1.9% in 2024. Next year, inflation will be significantly lower than this year, but for most of the year it will remain above 3%. The impact of weak economic dynamics on the labour market should not be significant given the persistent imbalances. The risks to the forecast are skewed to the downside.
Real gross domestic product of the Czech Republic, adjusted for seasonal and calendar effects, more or less stagnated in the first half of this year, but according to the preliminary estimate of the Czech Statistical Office, it fell by 0.3% QoQ in Q3 2023. Economic output has thus still not surpassed the pre-pandemic level.
For the full year 2023, GDP could fall by 0.5%. Households continue to face the impact of high inflation this year and their real consumption is expected to fall further. Investment activity is affected by economic problems in euro area countries and restrictive monetary conditions, but government spending co-financed by EU funds from the previous financial perspective is having a positive impact. Weaker year-on-year inventory accumulation should slow down the economy noticeably, especially in connection with the completion of work in progress. This factor, together with the unwinding of problems in supply chains, will boost exports, but imports will remain subdued in view of generally weak domestic demand. The contribution of the external trade balance to GDP growth should thus be significantly positive.
In 2024, the economy’s output could increase by 1.9%, mainly thanks to renewed growth in household consumption. Private investment and growth in export markets will also support economic activity. However, the impact of the consolidation package will dampen it slightly, but this will also help to reduce inflationary pressures.
High inflation continues to slow economic growth this year and reduce living standards. Not only food, electricity and natural gas, but also other categories of goods and services are contributing significantly to the exceptionally sharp rise in consumer prices. Strong domestic demand pressures are already being dampened by higher monetary policy rates. Annual inflation has been declining at a fast pace over the course of this year, but it will increase in Q4 due to the base effect of the energy tariff. The average inflation rate could reach 10.8% this year. Over most of 2024, annual consumer price inflation could already be between 3% and 4%. In full-year terms, we expect a decline to 3.3%.
Labour market imbalances related to labour shortages continue to manifest themselves. As a result, the unemployment rate should not increase much in 2023, despite the weak economic momentum. From an average of 2.2% in 2022, it could rise to 2.7% this year and further to 2.8% in 2024. Persistent labour market tightness will put upward pressure on wage growth, which will, however, continue to lag behind inflation this year. Thus, average real wage growth is not expected to resume until 2024.
The current account of the balance of payments was in a deficit of 4.3% of GDP in Q2 2023, mainly reflecting a deterioration in the balance of primary income due to higher outflows of investment income (mainly in the form of dividends). Conversely, the unwinding of price pressures in the industrial and energy sectors and the improvement in conditions in the export-oriented automotive industry have led to a return of the trade balance to surplus. At the same time, these factors should continue to be a guiding factor. The current account deficit should thus gradually narrow to 2.4% of GDP this year and to 1.2% of GDP next year.
The general government sector’s budget performance in 2023 reflects extraordinary revenues and expenditures related to the energy crisis, rising mandatory social spending and continued assistance to Ukrainian refugees. Thus, the general government deficit is likely to reach 3.6% of GDP this year, before narrowing to 2.2% of GDP next year, also as a result of the consolidation package. The fiscal policy stance will lead to a rise in debt to an estimated 44.7% of GDP in 2023, followed by 45.9% of GDP in 2024.
The macroeconomic forecast is subject to a number of risks that, in aggregate, we consider to be skewed to the downside. The main downside risk relates to the ability to compensate for the shortfall in natural gas and oil supplies from Russia to the European Union with increased imports from other suppliers and demand-side measures. The possibility of renewed problems in supply chains is also a significant risk, especially for certain sectors of the economy (automotive). In addition to the negative impact on economic performance, supply-side frictions would create additional inflationary pressures. These could also be triggered by a rise in energy commodity prices in the event of an escalation of tensions in the Middle East. The evolution of inflation and inflation expectations is also a risk, as is the overvaluation of residential property prices. On the positive side, however, the extraordinary increase in household savings in recent years could help cushion the impact of higher consumer prices on consumption. Economic growth could also be supported by successful integration of refugees from Ukraine and a full use of their human capital.
| 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 | 7 363 | 7 726 | 7 384 | 7 751 |
| nominal growth in % | 5,9 | 7,0 | -1,4 | 7,0 | 11,1 | 8,5 | 4,9 | 8,8 | 5,0 | |
| Gross domestic product | real growth in % | 3,2 | 3,0 | -5,5 | 3,6 | 2,4 | -0,5 | 1,9 | -0,2 | 2,3 |
| Consumption of households | real growth in % | 3,5 | 2,7 | -7,2 | 4,1 | -0,7 | -2,7 | 3,9 | -3,4 | 3,9 |
| Consumption of government | real growth in % | 3,9 | 2,5 | 4,2 | 1,4 | 0,6 | 2,4 | 1,6 | 2,4 | 1,8 |
| Gross fixed capital formation | real growth in % | 10,0 | 5,9 | -6,0 | 0,8 | 3,0 | 2,2 | 1,7 | 0,8 | 0,7 |
| Contribution of net exports | pp | -1,2 | 0,0 | -0,4 | -3,6 | 0,9 | 1,5 | 1,3 | 2,4 | 1,3 |
| Contrib. of change in inventories | pp | -0,5 | -0,3 | -0,9 | 4,8 | 0,9 | -1,8 | -1,9 | -1,7 | -1,3 |
| GDP deflator | growth in % | 2,6 | 3,9 | 4,3 | 3,3 | 8,5 | 9,0 | 3,0 | 9,0 | 2,6 |
| Average inflation rate | % | 2,1 | 2,8 | 3,2 | 3,8 | 15,1 | 10,8 | 3,3 | 10,9 | 2,8 |
| Employment (LFS) | growth in % | 1,3 | 0,2 | -1,7 | 0,4 | 1,5 | 0,9 | 0,5 | 1,1 | 0,7 |
| Unemployment rate (LFS) | average in % | 2,2 | 2,0 | 2,6 | 2,8 | 2,2 | 2,7 | 2,8 | 2,8 | 2,7 |
| Wage bill (domestic concept) | growth in % | 9,6 | 7,8 | 0,1 | 5,9 | 9,3 | 8,4 | 6,5 | 8,4 | 6,1 |
| Current account balance | % of GDP | 0,4 | 0,3 | 2,0 | -2,8 | -6,1 | -2,4 | -1,2 | -1,7 | -0,6 |
| General government balance | % of GDP | 0,9 | 0,3 | -5,8 | -5,1 | -3,2 | -3,6 | -2,2 | -3,6 | -2,2 |
| General government debt | % of GDP | 32,1 | 30,0 | 37,7 | 42,0 | 44,2 | 44,7 | 45,9 | 44,7 | 45,4 |
| Assumptions: | ||||||||||
| Exchange rate CZK/EUR | 25,6 | 25,7 | 26,4 | 25,6 | 24,6 | 24,0 | 24,4 | 23,8 | 23,9 | |
| Long-term interest rates | % p.a. | 2,0 | 1,5 | 1,1 | 1,9 | 4,3 | 4,4 | 3,6 | 4,3 | 3,9 |
| Crude oil Brent | USD/barrel | 71 | 64 | 42 | 71 | 101 | 83 | 84 | 80 | 77 |
| GDP in the euro area | real growth in % | 1,8 | 1,6 | -6,2 | 5,9 | 3,4 | 0,5 | 1,0 | 0,7 | 1,2 |
Tables and Graphs
Preparation of the Macroeconomic Forecasts
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Updated: 10.11.2023
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 31 October 2023.