Macroeconomic Forecast - January 2024
Summary of the Forecast
Last year, the Czech economy teetered on the edge of recession. For the full year 2023, gross domestic product is likely to have fallen by 0.6%, but is forecast to grow by 1.2% in 2024. Inflation will fall significantly this year and remain below 3% for most of the year. 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.
While real gross domestic product of the Czech Republic, adjusted for seasonal and calendar effects, had grown slightly in the first half of last year, it fell by 0.6% QoQ in Q3 2023. Economic performance had thus still not surpassed the pre-pandemic level.
For the full year 2023, GDP is likely to have fallen by 0.6%. Households have been struggling with high inflation, so their real consumption has decreased further. Investment activity was affected by economic problems in euro area countries and restrictive monetary conditions, but was positively influenced by government spending and projects co-financed by EU funds from the previous financial perspective. Weaker inventory accumulation, mainly due to the completion of work in progress, weighed substantially on the economy. This factor, together with the unwinding of problems in supply chains, boosted exports, but imports remained subdued in view of generally weak domestic demand. The contribution of the external trade balance to GDP growth was thus likely strongly positive.
In 2024, the economy’s output could increase by 1.2%, mainly thanks to renewed growth in household consumption. Private investment and growth in export markets will also support economic activity. The impact of the consolidation package will dampen it slightly, though, but this will also help to reduce inflationary pressures.
High inflation last year further slowed economic growth and lowered living standards. The average inflation rate reached 10.7% in 2023. Although annual inflation declined rapidly over the course of last year, it was boosted in Q4 by the base effect of the energy tariff. For most of this year, annual inflation should remain below the upper boundary of the Czech National Bank’s inflation target tolerance band. Inflationary external supply factors have considerably weakened, and domestic demand pressures will be further dampened throughout the year by higher monetary policy rates. This will be reinforced by the restrictive effect of the fiscal consolidation package. The average inflation rate could thus fall to 3.1% this year.
Labour market imbalances related to labour shortages continue to manifest themselves. As a result, despite the weak economic momentum, the unemployment rate should not rise much in 2024. From an estimated 2.6% in 2023, it could increase to 2.8% this year. The persistent tensions in the labour market will not allow a significant slowdown in wage growth. Earnings will also increase in real terms after two years of decline.
The current account of the balance of payments posted a deficit of 1.0% of GDP in Q3 2023. The noticeable quarter-on-quarter narrowing of the deficit was driven by lower outflows of investment income (mainly in the form of dividends) on the primary income balance. Unwinding of price pressures in the industry and energy sectors led to an increase in the positive trade balance, thanks to a higher decline in imports. At the same time, these factors should continue to be a guiding factor. We therefore estimate that the current account was in a slight deficit of 0.2% of GDP in 2023, and could reach a surplus of 0.4% of GDP this year due to a further improvement in terms of trade.
The general government sector’s budget performance in 2023 reflected extraordinary revenues and expenditures related to the energy crisis, rising mandatory social spending and continued assistance to Ukrainian refugees. At the moment, we maintain our estimate that the overall deficit reached 3.6% of GDP last year. The government’s consolidation efforts should be reflected in this year’s outturn, bringing the deficit below the 3% threshold set by European fiscal rules. As a result of the expected increase in general government debt in 2023 and high estimated nominal GDP growth, the debt ratio is projected to fall to 43.7% of GDP, with the debt ratio exceeding 45% of GDP this year.
The macroeconomic forecast is subject to risks that, in aggregate, we consider to be skewed to the downside. Economic activity, especially in some sectors of the economy (automotive), may be dampened by renewed problems in supply chains, e.g. in the context of the situation in the Middle East. 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 geopolitical tensions. The ability to replace the shortfall in natural gas and oil supplies from Russia to the European Union with increased imports from other suppliers and savings on the demand side is still a certain risk to the forecast. Inflation and inflation expectations, as well as overvaluation of residential property prices, are also risks for the Czech economy. 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 the successful integration of refugees from Ukraine and the 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 | 6 787 | 7 351 | 7 640 | 7 363 | 7 726 |
| nominal growth in % | 5,9 | 7,0 | -1,4 | 7,0 | 11,1 | 8,3 | 3,9 | 8,5 | 4,9 | |
| Gross domestic product | real growth in % | 3,2 | 3,0 | -5,5 | 3,6 | 2,4 | -0,6 | 1,2 | -0,5 | 1,9 |
| Consumption of households | real growth in % | 3,5 | 2,7 | -7,2 | 4,1 | -0,6 | -3,2 | 2,6 | -2,7 | 3,9 |
| Consumption of government | real growth in % | 3,9 | 2,5 | 4,2 | 1,4 | 0,3 | 3,1 | 1,6 | 2,4 | 1,6 |
| Gross fixed capital formation | real growth in % | 10,0 | 5,9 | -6,0 | 0,8 | 3,0 | 2,0 | 1,2 | 2,2 | 1,7 |
| Contribution of net exports | pp | -1,2 | 0,0 | -0,4 | -3,6 | 0,9 | 1,7 | 0,7 | 1,5 | 1,3 |
| Contrib. of change in inventories | pp | -0,5 | -0,3 | -0,9 | 4,8 | 0,9 | -2,0 | -1,4 | -1,8 | -1,9 |
| GDP deflator | growth in % | 2,6 | 3,9 | 4,3 | 3,3 | 8,5 | 8,9 | 2,8 | 9,0 | 3,0 |
| Average inflation rate | % | 2,1 | 2,8 | 3,2 | 3,8 | 15,1 | 10,7 | 3,1 | 10,8 | 3,3 |
| Employment (national accounts) | growth in % | 1,3 | 0,2 | -1,7 | 0,4 | 1,5 | 0,8 | 0,5 | 0,9 | 0,5 |
| Unemployment rate (LFS) | average in % | 2,2 | 2,0 | 2,6 | 2,8 | 2,2 | 2,6 | 2,8 | 2,7 | 2,8 |
| Wage bill (domestic concept) | growth in % | 9,6 | 7,8 | 0,1 | 5,9 | 9,3 | 8,4 | 6,6 | 8,4 | 6,5 |
| Current account balance | % of GDP | 0,4 | 0,3 | 2,0 | -2,8 | -6,1 | -0,2 | 0,4 | -2,4 | -1,2 |
| 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 | 43,7 | 45,6 | 44,7 | 45,9 |
| Assumptions: | ||||||||||
| Exchange rate CZK/EUR | 25,6 | 25,7 | 26,4 | 25,6 | 24,6 | 24,0 | 24,4 | 24,0 | 24,4 | |
| Long-term interest rates | % p.a. | 2,0 | 1,5 | 1,1 | 1,9 | 4,3 | 4,4 | 3,8 | 4,4 | 3,6 |
| Crude oil Brent | USD/barrel | 71 | 64 | 42 | 71 | 101 | 82 | 78 | 83 | 84 |
| GDP in the euro area | real growth in % | 1,8 | 1,6 | -6,2 | 5,9 | 3,4 | 0,5 | 0,7 | 0,5 | 1,0 |
Tables and Graphs
Preparation of the Macroeconomic Forecasts
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Updated: 25.1.2024
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 year 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 12 January 2024.