GDP revision: this year's growth is headed above 2% (depending on the Trump deal) thanks to stronger consumption amid higher saving rate
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
So we have new numbers on the performance of the economy coupled with annual numbers for 2024.
They show a slightly stronger post-covariance recovery, at 3.3% above pre-pandemic levels. But that doesn't take away the "gold medal" for the slowest recovery in private consumption, although slightly better than initially; here we are 2.2% below the pre-pandemic level in Q1-2025. Weaker fixed investment is still a wrinkle on the forehead, and we cannot take its 0.5% recovery in Q1-2025 as strong positive news. Their weak growth is sustained by the economic recovery combined with the inflationary effect of a labour market where wages are growing faster than productivity.
However, stronger household consumption has surprisingly been associated with higher household savings rates (i.e. what households have left of their disposable income after consumption). The Q1-2025 household savings rate "stayed" at 18.3%, which was the original Q4-2024 figure. But it was revised upwards to 19.8%, and was almost 2% points higher in full-year 2024, at 20.3%. These are funds that should be used for local investment, hence the current strong call for domestic capital market development. However, this improvement does not reflect stronger employment income, but other income, which led to positive revisions in average monthly household income per person of 1.7% and 2.3% in 2023 and 2024, respectively. This is driven by stronger household disposable income in 2024, up 2.7% from the original numbers, supported by more hours worked. I will certainly come back to this in the future.
Impact on the GDP outlook: the positive impact of stronger economic growth of 2.4% y-o-y in the first quarter on full-year performance in 2025 will be partly dampened by a higher base effect from 2024 due to slightly stronger quarterly GDP growth last year. However, even so, if the economy maintains half a percent quarter-on-quarter growth, then it would be up 2.5% year-on-year this year. This is well above our forecast of 1.7%, which was negatively impacted by Trump's tariff announcement. Here, uncertainty remains. For example, if there is no US-EU trade deal and the economy slows significantly to 0.2% q-o-q in the second half of the year, then GDP growth would slow to 2.2% this year after a 1.1% increase in 2024.
Neither scenario looks like the numbers will bring relief to inflationary pressures from the labour market. The economy needs to invest, continue to increase productivity (after easing in Q1) and therefore reduce its labour intensity. This will reduce unit labour cost growth and preferably by way of higher productivity with still solid wage growth. This is a nice pre-election task for the next government. If this does not happen, it will be more difficult for the CNB to proceed with further interest rate cuts without external reasons. By this I mean, for example, a stronger koruna supported by a possibly larger fall in interest rates in the euro area or the US.
Higher households' saving rate ...
... owing to the upward revision of disposable income in 2023 and 2024 that, however, weakened in Q1-2025 due to ongoing fiscal consolidation and lower interest rates
Key points in detail and charts below:
1. The post-holiday recovery in Czech GDP has improved slightly and its performance is 3.3% above the pre-pandemic Q4 2019. This is 0.3% points better than the original numbers showed.
2. However, private consumption lags 2.2% behind its pre-pandemic level. This is also only 0.3% points "better" than we saw a month ago. And so no one is going to take away our negative lead for the worst private consumption recovery in the EU. Household consumption accelerated to 0.5% quarter-on-quarter in Q1 2025 from the 0.1% initially reported. However, this reflects a more moderate growth in the final quarter of 2024, with an unchanged 0.8% quarter-on-quarter increase in household consumption spending. Private consumption confirms the volatility of revisions, so new numbers should be taken with a grain of salt.
3. In contrast, government consumption is now less than 14% above pre-pandemic levels, fixed investment over 7%, exports and imports around 12%.
4. Fixed investment, however, is weakening with an average 1.3% q-o-q decline in 2024, coupled with weak average export growth of 0.3% q-o-q and an average 1% q-o-q decline in manufacturing value added in 2024. Thus, a recovery in fixed investment of 0.5% q-o-q in Q1-2025, driven by construction, cannot be taken as strong positive news.
5. QoQ GDP growth in Q1 this year was a slightly weaker 0.7% than the initial 0.8%. But this reflects the previous stronger recovery in 2024, which also lifted annual GDP growth in Q1 2025 to 2.4% from the 2.2% initially reported.
6. GDP growth reached 1.1% y/y in2024, following a 0.2% increase in 2023. Average quarter-on-quarter GDP growth reached 0.5% last year (originally 0.4%) and closed with 0.8% growth in Q4-2024.
7. Andhow is value added doing, as the economy's dynamics have been affected in recent years by fluctuations related to subsidy disbursements (energy crisis, fiscal consolidation)? Value added growth in 2024 has reached a more moderate average quarter-on-quarter rate than GDP, at 0.3%. In the first quarter of this year, its growth strengthened to 0.9%, after an average growth of 0.7% in the second half of 2024. Here, the biggest correction in momentum has occurred, as the original numbers pointed to a stronger growth of 1.3% in Q12025, but after a weaker 0.1% growth in Q4-2024. Even so, the average growth of value added in the last two quarters remains essentially unchanged at 0.7% q-o-q.
8. Sector-wise, trade, ICT sector, money sector remain the drivers of value added, with trade again adding to it and with construction strengthening.
9. Revisions to the numbers do not change the higher pace of unit labour costs (NJMN/ULC) of 1.3% q-o-q in Q1-2025, the same as in 2024, which is coupled with a 1.2% increase in business services following 1% growth in 2024.
Note: Unless otherwise stated, we use seasonally adjusted figures in the text. Annualized developments show possible year-on-year growth in the annual outlook if current month-on-month dynamics were to be maintained.