Real GDP growth is forecast to moderate to 2.5% this year and to further decline in 2023, due to spillover effects from Russia’s war of aggression against Ukraine and elevated price pressures amid tight domestic financial conditions. The inflation rate is set to increase to over 15% this year and remain elevated in 2023. To tackle the high energy inflation, the government is introducing support measures for households and companies. While these increase public expenditures, windfall tax revenues are forecast to reduce the pressure on the budget deficit.
Last update (forecast)
Last update (11/11/2022)
|GDP growth (%, yoy)||3,5||2,5||0,1||1,8|
|Inflation (%, yoy)||3,3||15,6||9,5||3,5|
|General government balance (% of GDP)||-5,1||-4,3||-4,1||-3,0|
|Gross public debt (% of GDP)||42,0||42,9||44,2||44,5|
|Current account balance (% of GDP)||-2,6||-5,8||-6,9||-5,9|
Economic growth to weaken
The Czech economy continued to grow fast in the first half of this year, driven by buoyant investment activity. In the coming quarters, economic growth is expected to be dampened due to a deterioration in consumer and business sentiment and the financial situation of Czech firms and households.
Annual GDP growth is forecast at 2.5% in 2022. In line with weakening foreign demand, a tightening of financial conditions, and high energy prices, real GDP is forecast to stagnate in 2023 and to grow by 1.8% in 2024 reaching pre-pandemic output levels at the beginning of 2024.
Private consumption is expected to contract towards the end of this year and to remain subdued in 2023, reflecting a decline in real disposable income as household savings cannot fully compensate the loss of purchasing power. The saving rate is forecast to decline in 2023.
Investment activity is expected to pick up significantly in 2022. Despite government investment benefiting from EU structural and RRF funds, investment growth is forecast to be limited in 2023, reflecting lower business confidence, elevated cost pressures and a gradual depletion of inventories from the current elevated levels.
Czechia’s industry-based economy, which relies on imports, continues to be strongly affected by supply chain disruptions and high energy prices. Net exports are forecast to have a neutral contribution to economic growth in 2022, but to turn positive in 2023 and 2024.
This outlook is subject to high uncertainty. Most notably, in relation to further disruptions of energy markets and stronger persistence of inflation than in other Member States due to the energy intensity of the Czech economy.
Labour market to remain robust
The unemployment rate is forecast to remain around 2.6% in 2022. While increasing slightly over the forecast horizon. The rate is expected to stay low in light of the GDP contraction and the displaced persons from Ukraine joining the labour force. Despite the tight labour market in Czechia, real wages are set to decline in 2022 and 2023, as nominal wage growth lags behind inflation before increasing more strongly in 2024.
Inflation to stay high in the medium term
Inflation is expected to peak in the fourth quarter of this year reaching almost 20%. For 2022 as whole, headline inflation is forecast at 15.6% and core inflation at 12.5%, reflecting higher cost of domestic production and imports. Driven by second-round effects, the price level is set to remain elevated also at the beginning of 2023. The impact of government measures, notably the cap on retail gas prices, is expected to mitigate inflation in 2023. Inflation is projected to decelerate to 9.5% in 2023 and to 3.5% in 2024.
Deficit to decline despite measures to mitigate the impact of high energy prices
The Czech budget deficit decreased to 5.1% of GDP in 2021 and is set to further decline to 4.3% in 2022. The decrease comes on the back of a gradual withdrawal of COVID-19 related support measures and a high inflation that boosts tax revenues. At the same time, expenditures are increasing due to the automatic indexation of pensions with inflation, support measures to mitigate the impact of high energy prices (for industry and for households, with total net costs estimated at 1% of GDP) and measures to support the inflow of people fleeing from Ukraine. Due to a high base in 2021, public salaries growth remains contained in 2022.
The budget deficit is forecast to decrease to 4.1% of GDP in 2023. Expenditure is set to increase due to the implementation of a cap on energy prices according to which the government will reimburse energy suppliers for eventual losses when selling electricity and gas at fixed prices. However, this extra expenditure is assumed to be covered by revenue from a windfall tax applied to the largest energy companies and banks as well as a levy on revenues above a certain price ceiling for electricity producers. An additional increase in expenditure results from further indexations of pensions with inflation as well as from additional social measures, both permanent and temporary. The deficit is expected to decrease in 2024 to 3.0% as the energy support measures are assumed to be withdrawn. Still, the deficit estimates for 2023-2024 are subject to high risks given the volatile energy prices and the risk of mismatch between expenditure and revenue from windfall taxes and levies.
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 2022 and 2023 before dropping to a historical average level in 2024.
While public debt is still low compared to other EU Member States, the pace of its growth in 2020-2021 was above the EU average. The public debt-to-GDP ratio is forecast to rise to 42.9% in 2022, 44.2% in 2023 and 44.5% in 2024, driven by the negative headline balance, being only partly offset by nominal GDP growth.