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Economy and Finance
  • 15 November 2024

Economic forecast for Czechia

The latest macroeconomic forecast for Czechia.

Czechia’s economy is set to resume growth in 2024, with real GDP estimated to grow at 1.0%. It is forecast to accelerate to 2.4% in 2025 and 2.7% in 2026. As inflation recedes, the growth in real wages should help household consumption re-emerge as the main driver of economic activity. However, the pace of growth is expected to remain restrained, reflecting consumers’ still cautionary behaviour. Headline inflation is projected at 2.7% in 2024, 2.4% in 2025 and 2.0% in 2026, with services contributing the most. 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 to 2.5% in 2024, 2.3% in 2025 and 1.9% in 2026. 

Indicators202420252026
GDP growth (%, yoy)1,02,42,7
Inflation (%, yoy)2,72,42,0
Unemployment (%)2,62,72,7
General government balance (% of GDP)-2,5-2,3-1,9
Gross public debt (% of GDP)43,444,444,8
Current account balance (% of GDP)4,33,33,2

Economic activity set to recover at a slow pace 

Czechia’s real GDP is expected to grow 1.0% in 2024 as both domestic and external demand show only modest signs of recovery. GDP growth is set to accelerate in 2025 and 2026 driven by households’ consumption and investment activity while net exports contribute negatively.   

Household consumption used to be one of the primary drivers of GDP growth before the COVID-19 pandemic. However, the erosion of purchasing power due to high inflation in 2022-23 and the shifts in saving behaviours have weighed on consumption which remains below 2019 levels. Household demand is projected to recover going forward but only gradually. Consumer confidence is still affected by perceived risks of economic and income growth uncertainty. Saving rates have been lately more skewed towards higher income households who have a lower propensity to consume considering also the still elevated interest rates environment. Additionally, lower income households could still be maintaining precautionary savings, weighing on the pace of consumption growth.  

Investments reached historical highs as a share of GDP. After a slowdown in 2024, investment growth is forecast to remain high in 2025 and 2026, driven by increased absorption of EU funds, a recovery in the residential construction and foreign direct investments. Exports growth is slow, in line with the subdued economic activity of Czechia’s trading partners. The automotive industry is expected to remain a main contributor to exports, though services (IT, transport) are growing fast even if they remain limited in size. Driven by household consumption and investments, imports are also set to accelerate, leading to a negative net exports contribution to growth. Risks remain to the downside as the Czech economy, with its high energy intensity and trade openness, remains vulnerable to potential shocks in energy prices and to sluggish exports growth.   

Labour market remains tight   

Despite the recovery in economic activity, the unemployment rate is expected to marginally increase from 2.6% in 2024-Q2 to 2.7% in 2026. While the level of unemployment remains one of the lowest in the EU, the pressures on the labour market are expected to diminish slightly. Wage growth is expected at 6.2% in 2024 and 6.5% in 2025, before slowing to 5.6% in 2026. 

Inflation on a downward path  

After two years of double-digit inflation, HICP headline inflation is expected to slow down to 2.7% in 2024, 2.4% in 2025 and 2.0% in 2026. Energy is set to contribute negatively to inflation in 2025 as wholesale prices are declining and network tariff growth is expected to be subdued. Processed and unprocessed food prices temporarily gained pace in the last months, despite the cut in VAT at the beginning of 2024. Going forward, services inflation is set to be the HICP item with the highest growth at 4.8% in 2025 and 3.6% in 2026, driven by wages growth. HICP inflation excluding energy, food, alcohol and tobacco is projected above headline inflation at 4.2% in 2024 and 3.0% in 2025. The forecast assumes that the relatively high companies’ margins absorb some of the growth in salaries, but risks remain to the upside. 

Consolidation of public finances slows down  

In 2024, the budget deficit is set to drop to 2.5%, from 3.8% in 2023. This reduction is driven by the expiration of measures to mitigate the impact of high energy prices, a reduction of government subsidies to renewable energy sources, and further decrease of expenditure and increase of revenue in the context of the government consolidation package. The measures to mitigate the impact of high energy prices are projected to be phased out in 2024. 

The budget deficit is forecast to further decline to 2.3% of GDP in 2025, turning the fiscal stance from contractionary to neutral. Revenue will be supported by social security contributions and personal income taxes as salaries are projected to grow more than GDP. Expenditure is set to continue decreasing as a percentage of GDP, albeit at a slower pace. While the growth of social benefits will decelerate due to reduced indexation of pensions, compensation of government employees is expected to rise in line with nominal wage increases. 

The deficit is expected to come down to 1.9% in 2026. The revenue-to-GDP ratio is projected to decrease, mainly because of the phase-out of the tax on the windfall profits of energy and financial companies. The expenditure-to-GDP ratio is set to decline, as spending on social benefits grows slower than GDP. Overall, this implies a slightly contractionary fiscal stance for 2026.  

As the RRF funds are being drawn together with those from the current programming period of structural funds, public investment is set to grow strongly in 2025 before dropping to a long-term average level in 2026. Public debt is set to remain low compared to the EU average. The public debt-to-GDP ratio is forecast to rise from 42.4% in 2023, to 44.8% in 2026, driven by the negative headline balance, being partly offset by nominal GDP growth.