MACROECONOMIC FORECAST OF THE CZECH REPUBLIC 4Q 24

Prague, 14 November 2024 - The chief economists of the banks represented in the forecasting panel of the Czech Banking Association (CBA) expect the domestic economy to grow by 1% this year, which is similar to the value expected in the previous forecast. GDP is expected to accelerate by 2.3% next year. The growth estimate for next year has been revised down by almost half a percentage point compared to August, mainly due to weaker developments abroad. Average inflation will fall to 2.4% this year and should be at a similar level next year, but the estimates have been revised up slightly for both this year and next. At the end of next year, however, inflation should be close to the CNB's 2% target. Nominal wages will rise by just under 7% this year and by more than 4% in real terms, marking the first full-year increase in real wages after a two-year hiatus. While some signs of cooling in the labour market are already visible, the weak economic development has had a very limited impact on it so far. CNB interest rates are unlikely to fall again this year, although the consensus is divided here and some economists expect one more cut at the December monetary policy meeting, with the main rate expected to reach 3.25% by the end of next year. The koruna has been revised towards weaker levels in the new forecast and is expected to be trading at CZK 25.1 per euro at the end of this year, with appreciation to CZK 24.7 per euro by the end of next year.

Global uncertainty persists

Developments abroad pose a number of challenges for the domestic economy and remain one of the main factors behind its slower recovery. In particular, the combination of structural and cyclical problems in the German economy is one of the main reasons why more favourable expectations of faster growth have not been met this year and why growth for next year is gradually being revised lower. A number of EU countries are still affected by higher energy prices, which is having a particularly negative impact on energy-intensive industries and their competitiveness. European industry is thus struggling with the recession and remains close to 2019 production levels. The US election results are another negative factor for the domestic economy in terms of the likely introduction of stronger protectionist measures and trade tariffs, although they have not yet led to significant pressure on the koruna exchange rate. This is probably due to the high reserves of the central bank, which can support the koruna if necessary, as the market is aware of.

Jakub Seidler, Chief Economist, Czech Banking Association:
"Foreign demand is still lagging behind expectations and the weaker performance of Germany in particular is causing only a very cautious recovery of the domestic economy. This year it will grow by around 1% and next year the estimates are lowered to closer to 2%, with the risks being in the direction of weaker growth due to the continued slowdown in industry and foreign trade."

Domestic economy grows only moderately this year

The CBA's new forecast for this year still expects the domestic economy to grow by 1%, which is only slightly above the previous forecast's estimate of 0.9%. According to the preliminary estimate of GDP for Q3 this year, the Czech economy grew by 0.3% quarter-on-quarter (1.3% year-on-year), continuing a very weak recovery that did not meet the expectations of the CBA's previous August forecast. Although the quarter-on-quarter growth in the first half of the year turned out to be slightly stronger after revisions, the expected acceleration of growth in the second half of the year, by contrast, is not materialising according to preliminary indicators. These developments have offset each other over the course of the year, leaving the overall growth estimate for this year at 1%. The forecast expects the quarter-on-quarter growth rate to increase to 0.5% at the end of the year and to average around 0.6% next year. Failure to meet this assumption would lead to a further downward revision of the growth estimate for next year towards 2% or slightly below. The expected recovery of the domestic economy is thus still expected to be relatively slow and burdened by a number of risks.

The forecast assumes that economic growth will be driven mainly by domestic demand, given renewed growth in real wages. Household consumption has started to grow again after a decline in the previous two years, and we expect it to grow by 1.8% for this year as a whole and by less than 3% next year. In both cases, the dynamics is slightly weaker than expected in the previous forecast, due to a slower take-off in household spending this year and a continued higher savings rate in the context of weaker confidence and uncertainties about future economic developments. Retail sales, excluding car sales, are already up over 5% year-on-year, but overall real sales are still below the 2019 average and only non-food goods are 7% higher. Government consumption is expected to grow over 3% this year, here the estimate has been revised up from the previous forecast due to stronger data for the first half of this year and also the impact of increased spending from flood compensation. Investment will grow only moderately this year (0.7%), with its weak development this year linked to the EU funds absorption cycle, a weaker outlook for the economy and also lower corporate profitability. It should then accelerate next year (2.6%), which will then probably again create an accumulation of inventories, which have been significantly volatile in previous years. The evolution of external demand did not confirm the expectations of a more robust recovery in the last forecast, which is why exports have been revised towards weaker values for this year.

Labour market starts to cool slightly, but the share of unemployed persons will increase only slightly this year

The domestic labour market remains tight in the context of economic developments, with the unemployment rate the lowest in the EU. The overall share of unemployed persons averaged 3.6% in 2023 and is expected to rise only slightly to 3.8% this year and 3.9% next year. However, this is still lower than what we observed in 2017, when the labour market was already starting to show signs of overheating. While the domestic labour market remains in a state where many employers are struggling to find suitable staff, there have been some signs of cooling over the past few quarters and the headline unemployment rate stood at 2.9% in September, 0.2pp above the same period last year. The seasonally adjusted unemployment rate is also on a steadily rising trend and has been rising gradually - albeit slightly - since the end of last year, but according to preliminary figures the unemployment rate is expected to fall slightly again over the next year.

Nominal average wages are expected to rise by 6.6% this year, with a growth rate of just under 6% next year. Nominal wage growth reached 8% last year, one of the highest annual increases in the last two decades. Compared to nominal wage developments in the Central European region, however, wage developments in the Czech Republic are lagging behind, not only in the last few years since the pandemic broke out, but also in the longer term. After two years of falling real wages, real wages are expected to grow by 4.1% this year and over 3% next year. Even so, this year's level of real wages will be roughly in line with 2018. Higher wage growth than expected in this forecast may then result from possible faster wage growth in the public sector.

Jan Vejmělek, Komerční banka's Chief Economist:
"Nominal wage growth should be around 6% this year and next.However, given the previous deep decline in real wages, this will mean that households' purchasing power and consumption will recover only slowly."

Average inflation this year and next will be slightly above the CNB's 2% target

Food prices have been anti-inflationary for much of this year, and their year-on-year decline has helped inflation return more quickly to the CNB's 2% target. However, the anti-inflationary effect of food has started to fade in recent months, which has also led to higher-than-expected annual inflation. These developments, together with a slower decline in energy prices or a renewed rise in imputed rents, were behind the slight upward revision of annual inflation for this year and next. By the end of this year, inflation is expected to accelerate further due to the effect of the lower benchmark base, especially in December, and annual inflation may get above 3%. However, this should only be a short-term blip and inflation should then fall again in January, starting at 2. However, the slow decline in services inflation remains a risk. Despite higher full-year inflation next year, the consensus expects inflation to be near 2% at the end of next year.

The CNB will continue to cut rates next year, but is unlikely to change rates this year

The Czech National Bank continued to cut interest rates by the traditional quarter of a percentage point in November. The main rate has thus fallen to 4%. Central bank officials have indicated that they will be very cautious in cutting rates further. The median of the forecast estimates thus assumes that the central bank will not cut rates again this year, but the estimate is split 5:4 on this point, with only a slightly smaller proportion of forecasters expecting one more cut to 3.75% by the end of the year. For the end of next year, the consensus expects a headline rate of 3.25%, assuming that inflation stabilises in the second half of the year and moves towards the 2% target, which is the current forecast expectation.

Michal Skořepa, economic analyst at Česká spořitelna:
"The CBA's forecast panel now expects that the Czech National Bank is unlikely to change its interest rates this year. For 2025, it expects a fairly steady decline in these rates, while the recently released forecast of the Czech National Bank itself indicated a somewhat more significant decline overall, which should take place at the end of this year and in the first half of next year."

The exchange rate of the koruna had been revised only very slightly towards weaker values in the new forecast. The average value for this year should thus remain above CZK 25 per euro. At the end of this year, the forecast panel continues to estimate a strengthening of the koruna and an exchange rate close to CZK 25 per euro. The dispersion of the estimates of the individual forecasts is exceptionally narrow in this respect and none of the forecasts sees the koruna exchange rate above its current level at the end of this year. By the end of next year, the koruna will appreciate by less than 2% against the euro to CZK 24.7 per euro. A potential risk in this respect is a more noticeable long-term strengthening of the dollar against the euro following, among other things, the tariff measures announced by the incoming US President Trump, which could lead to a slightly weaker level of the koruna next year not only against the dollar but also against the euro.

Government deficit to GDP will gradually decline

The CBA forecast estimates the government deficit for this year at 2.7% of GDP, which will reduce the deficit by almost 1 percentage point compared to the previous year. The deficit for next year is estimated at 2.3%, mainly due to the expected faster growth of the domestic economy.

The credit market is developing favourably this year

In three quarters of a year, the year-on-year growth of mortgage loans has reached almost 100%. According to official CNB statistics, new mortgages (excluding refinancing) were granted in the amount of CZK 152 billion from January to September, which is a similar volume as in the same period in 2020. However, the data from the CBA Hypomonitor show that in terms of the number of mortgages granted, there were a quarter fewer mortgages granted in the period compared to 2020. This development is related to the fact that the average mortgage amount has increased in the last year. According to the CNB statistics, the interest rate on newly granted mortgages is slightly below 5%, which also corresponds to the data from the CBA Hypomonitor.

The volume of new consumer loans increased by almost a third between January and September and exceeded CZK 100 billion. The favourable development is due to the improving income situation of households, higher consumer confidence and also the need for more financing due to the inflationary developments of recent years. Evidence from some banks suggests that the growth in consumer credit is being driven by so-called 'American mortgages', i.e. non-purpose consumer loans secured by real estate. The average interest rate on consumer loans was 8.9% in September, almost one percentage point lower than a year ago.

New loans to businesses also showed more favourable dynamics in the first three quarters of the year following the CNB's September data revision. From January to September, the volume of newly granted CZK-denominated loans rose by 28% year-on-year, and by 14.5% in the case of euro-denominated loans. The total increase in new loans in both currencies thus exceeded 20% year-on-year. The share of euro-denominated loans in the period was 47%, compared with 51.5% in 2023. The lower share of euro-denominated loans is related to the narrowing interest rate differential between loans in the two currencies, which was below 1 percentage point in September and was thus the lowest since the end of 2021. The average rate for new koruna loans was 5.9% in September, and 5.2% for euro-denominated loans.

Deposit growth in the third quarter of this year slowed slightly from 7.7% to 6.6% compared with the first half of the year. For households, the pace was slightly stronger at 7.9%, although it also slowed from 8.4%. Given that around one-third of the growth in household deposits last year was accounted for by interest income, the year-on-year growth in deposits can be expected to slow further as CNB interest rates fall.

The CBA macroeconomic forecast in figures:

Indicator	2023	2024	2025
Indicator
Real GDP growth (%)	0,0	1,0	2,3
Household consumption growth (%)	-2,9	1,8	2,7
Government consumption growth (%)	3,5	3,3	1,7
Investment growth (excluding inventories, %)	2,7	0,7	2,6
Export growth (%)	3,0	1,3	3,5
Growth in imports (%)	-0,6	0,0	3,9
Inflation rate: CPI (%) average	10,7	2,4	2,5
Inflation rate: CPI (%) end of year	6,9	3,1	2,0
Percentage of unemployed persons (MoLSA): average (%)	3,6	3,8	3,9
Average nominal wage (% growth)	8,0	6,6	5,8
Average real wage (%)	-2,4	4,1	3,2
Government deficit/surplus (% of GDP)	-3,5	-2,7	-2,3
Government debt (% of GDP)	42,4	43,5	44,1
CNB 2T REPO base rate (%): end of period	6,75	4,00	3,25
3M-PRIBOR (%): average	7,12	4,99	3,60
10-year government bond yield (%): average	4,50	3,97	3,84
ECB base rate (%): end of period	4,50	3,15	2,40
CZK/EUR exchange rate: average	24,00	25,10	24,90
CZK/EUR exchange rate: end of the year	24,70	25,15	24,70
Real GDP growth in the euro area (%)	0,5	0,7	1,1
Oil prices (USD per barrel): Brent average	82	82	75
Growth in bank customer loans (%)	5,9	6,2	5,7
Growth in bank loans to households (%)	4,8	5,0	5,6
Growth in bank lending to (non-financial) corporations (%)	4,7	7,4	5,5
Growth in total bank customer deposits (%)	7,9	7,3	5,8