Following moderate economic activity in 2022, real GDP growth in Czechia is forecast to decelerate to 0.2% in 2023, due to elevated price pressures amid tight domestic financial conditions. The inflation rate is set to remain close to 12% in 2023 but to decline to 3.4% in 2024. The general government deficit is still affected by energy support measures in 2023, but it is forecast to decline to 3% in 2024.
| Indicators | 2022 | 2023 | 2024 |
|---|---|---|---|
| GDP growth (%, yoy) | 2,5 | 0,2 | 2,6 |
| Inflation (%, yoy) | 14,8 | 11,9 | 3,4 |
| Unemployment (%) | 2,2 | 2,8 | 2,6 |
| General government balance (% of GDP) | -3,6 | -3,6 | -3,0 |
| Gross public debt (% of GDP) | 44,1 | 42,9 | 43,1 |
| Current account balance (% of GDP) | -5,4 | -2,5 | -0,7 |
Economy to weaken on its way to recovery
Czechia’s real GDP grew by 2.5% in 2022, driven by investment and increased inventories, while dampened by weak household consumption amid lower consumer confidence and the tighter financial situation of Czech households. Economic activity is expected to remain subdued over the first half of 2023, with real GDP growth in the first quarter estimated at 0.1% q-o-q, mainly on the back of foreign demand amid low domestic consumption. Annual GDP growth is forecast to slow to 0.2% in 2023, and to recover to 2.6% in 2024, reaching pre-pandemic output levels at the end of 2023.
Despite several fiscal stimulus measures, household consumption declined for five consecutive quarters until the end of 2022 and is expected to remain subdued also in 2023. Declining real disposable income and tightening financing conditions are the key factors. Household consumption is forecast to start increasing during 2023. In line with developments in real income, household consumption is projected to become the main driver of real GDP growth in 2024 together with foreign demand.
Investment activity picked up significantly in 2022 and is expected to remain the key growth driver in 2023, significantly supported by EU structural and RRF funds. At the same time, the tight financial conditions and persistent labour shortages are expected to weigh on business investment growth over the forecast horizon. The easing of supply chain problems is set to have a positive impact on exports, which are projected to increase in 2023 and 2024. Weaker domestic demand is set to hold back imports in 2023. While imports are expected to rebound in 2024, a positive contribution of net exports to GDP growth is forecast over the forecast horizon.
This outlook is subject to high uncertainty, most notably, in relation to the risks of further disruptions of energy markets given the energy intensity of the Czech economy.
Labour market to remain robust
Labour demand remained resilient to the economic slowdown in recent quarters and the unemployment rate declined to 2.2% in 2022. It is forecast to remain low in 2023, around 2.8%, and to decline to 2.6% in 2024. Shortages of skilled workers are set to persist. Despite the tight labour market, real wages are still projected to decline in 2023, as nominal wage growth lags behind inflation. Real wages are expected to increase by 3.2% in 2024 amidst recovering economic activity.
Inflation to decline as from summer 2023
Headline inflation appears to have peaked at 18% in 2023-Q1, following the phase-out of the savings tariff on energy prices, which was not fully offset by a cap on electricity and gas prices introduced by the Czech government. Energy prices are expected to decline in 2023-Q2 and remain stable afterwards. The inflation rate is set to decrease, driven mainly by base effects, accompanied by lower commodity prices, recent currency appreciation and weak consumer demand. The annual average inflation rate is projected to decelerate from 14.6% in 2022 to 11.9% in 2023 and to then drop further to 3.4% in 2024 on the back of a decrease in energy costs and related spill-over effects. This forecast assumes that the price cap on energy is phased out in December 2023. The economic outlook remains sensitive to energy commodity prices and financing conditions.
Fiscal consolidation is beginning
The Czech budget deficit decreased to 3.6% of GDP in 2022 on the back of expenditures contracting in real terms as the COVID-19 related programmes were withdrawn and the new energy-related support measures had a lower cost than initially anticipated.
The budget deficit is forecast to remain unchanged at 3.6% of GDP in 2023. Several energy support measures, including price caps on energy prices or support for vulnerable consumers, have been put in place to help households and the industry faced with raising energy prices. These are to be partly financed from a tax and a levy on energy producers’ windfall revenues, as well as by high property income revenues. The net budgetary cost of the energy support measures is projected in the Commission 2023 spring forecast at 1.3% of GDP in 2023, compared with 0.7% in 2022. The Commission currently assumes the net cost of energy support measures at 0% of GDP in 2024. The forecast also incorporates a reduced indexation of pensions for this year (as already approved by the Parliament) and contained growth in public employees’ salaries. The deficit is expected to decrease in 2024 to 3.0% as energy support measures are assumed to be withdrawn.
Risks that could increase the deficit forecast include a reversal of the cut in pensions’ indexation or an increase in public employees’ salaries as discussed in the Parliament. A fiscal consolidation programme of at least 1 pp. of GDP discussed by the government could reduce the deficit in 2024.
As the remaining structural funds from the previous programming period are still being drawn this year together with those from the new programming period and RRF funds, public investment is set to grow strongly in 2023 before dropping to its historical average in 2024.
While the public debt-to-GDP ratio is still low compared to other EU Member States, the pace of its growth in 2020-22 was above the EU average (from 30% in 2019 to 44% in 2022). On the back of high nominal GDP growth and a decreasing public deficit, the public debt-to-GDP ratio is expected to decrease slightly and stabilise at 43.1% in 2023 and 43.4% in 2024.