Following an estimated stagnation in 2023, economic activity in Czechia is expected to only gradually pick up pace reaching 1.4% in 2024 and 3.0% in 2025. The decline in inflation from 12.2% in 2023 to 3.2% in 2024 is likely to help households gain confidence for increased spending, and triggering also an acceleration in investments in 2025. Conversely, the phase-out of measures to mitigate the impact of high energy prices and the government’s public finance consolidation package are set to lead to a decline in the budget deficit and provide a negative momentum to GDP growth.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | -0,4 | 1,4 | 3,0 |
| Inflation (%, yoy) | 12,2 | 3,2 | 2,4 |
| Unemployment (%) | 2,4 | 2,5 | 2,5 |
| General government balance (% of GDP) | -3,8 | -2,4 | -1,8 |
| Gross public debt (% of GDP) | 44,7 | 45,5 | 45,5 |
| Current account balance (% of GDP) | -0,3 | 0,8 | 0,9 |
Delayed economic recovery
Economic growth has been flat in Czechia in the past four quarters as the high inflation and tight financial conditions led to a decline in real household income and an increase in precautionary savings, dampening private consumption. Net exports contributed positively, helped by lower imports of energy and unwinding of high accumulated inventories. For 2023, real GDP is forecast to stagnate, while for 2024 it is expected to grow at 1.4% as consumer confidence and spending improve on the back of declining inflation and growth of real wages. An acceleration to 3.0% is projected in 2025 driven by a further boost of household consumption and a pick-up in investments.
Household consumption has declined for six consecutive quarters before recording a small increase in Q2-2023. The growth is set to gradually pick up in 2024 and 2025 as falling inflation increases real disposable income. In addition, the gradual relaxation of financing conditions and the high saving rate should further support consumption. Conversely, the fiscal consolidation package and expiry of energy measures are projected to provide a contractionary momentum. Investment performance was uneven in the past quarters with positive one-offs in equipment investments but declining construction activity. Investment is set to grow moderately in 2024 as the end of the EU structural funds cycle weighs on, while companies’ still high profit margins provide some support. Investment growth is projected to pick up in 2025 as the economic activity increases and financing conditions are expected to gradually improve.
After a slowdown in the past four quarters, recovering external demand should help exports growth in 2024 and 2025. However, weak internal demand and declining energy consumption lead to a drop in imports and boosts net exports in 2023, with the effect fading over 2024 and 2025. Risks remain on the downside considering the high degree of trade openness of the Czech economy and its high energy intensity, which could dampen industrial activity in case of a downturn of global trade or another increase in energy prices.
Labour market to remain robust
The labour market remains resilient and, while the economic slowdown this year is likely to lead to a small increase in the unemployment rate (to 2.4% from 2.2% in 2022), it is forecast to remain broadly stable in 2024 and 2025. Shortages of skilled workers are set to persist. After a temporary decline in real wages in 2022 and 2023, a recovery is expected over 2024 and 2025 when growth in net income should outpace inflation and thus recover some of the lost ground from the high-inflationary period.
Inflation on a downward path
After a peak in headline inflation at 18% in 2023-Q1, the rate has declined significantly driven by lower growth of energy and food prices. Considering also accumulated high base effects, inflation is set to decelerate to 12.2% in 2023, 3.2% in 2024 and 2.4% in 2025. Energy prices are set to see another year-on-year increase in Q4-2023 and Q1-2024 due to the expiry of energy measures. The latter leads also to increases in network fees which offset the decline in electricity and gas commodity prices. On the back of increases in salaries, inflation excluding unprocessed food and energy is expected to decline less than headline inflation but will remain moderate.
Deficit to decline on the back of phasing out of energy-related measures
In 2023, the budget deficit is set to rise to 3.8%. This upswing is driven by expenditures increasing faster than GDP due to the automatic indexation of pensions to inflation, and measures to mitigate the impact of high energy prices. The total (net) budgetary cost of the energy-related measures is estimated at 1.2% of GDP in 2023. In addition, public investment is expected to peak in 2023 due to the completion of projects financed by EU funds in the programming period 2014-2020.
The budget deficit is forecast to drop to 2.4% of GDP in 2024 as measures to mitigate the impact of high energy prices expire, and the government implements a consolidation package which aims to further decrease expenditure and increase revenue. Expenditure is set to decrease as percentage of GDP due to the phasing out of the energy-related measures, including the elimination of the cap on energy prices, and due to reduction of government subsidies to renewable sources of energy. The total (net) budgetary cost of the energy-related measures is projected at 0% of GDP in 2024. Revenues are supported by corporate income taxes on the back of a higher tax rate, as well as higher social security contributions as salary growth is projected to be higher than GDP growth. The deficit is expected to come down in 2025 to 1.8% as GDP growth is forecast to accelerate.
As the remaining structural funds from the previous programming period are still being drawn together with those from the new programming period and RRF funds, public investment is set to grow strongly in 2023 before dropping to a historical average level in 2024.
Public debt is still low compared to the EU average despite its high pace of growth in 2020-2022. The public debt-to-GDP ratio is forecast to rise only slightly from 44.2% in 2022, to 45.5% in 2025, driven by the negative headline balance, being partly offset by nominal GDP growth.