COMMENTARY OF EVA ZAMRAZILOVÁ: A FURTHER DECELERATION CAN BE EXPECTED IN 2020

COMMENTARY OF EVA ZAMRAZILOVÁ: A FURTHER DECELERATION CAN BE EXPECTED IN 2020

Below, you can find commentary of the Chairman of the Czech Fiscal Council, Eva Zamrazilová. The text was first published in a special supplement of the Banking monthly magazine entitled Top Finance (Bankovnictví, vol. 1/2020).

Developments abroad will continue to be essential to the Czech economy in 2020. In 2019, the global economy was weakened by problems in trade relations that affected global trade. Added to that was a slow-down in emerging markets and the pending Brexit, which combined resulted in a weakening of domestic demand and overall worsening of sentiments.

That is why global growth in 2019 was the weakest in recent decades, which naturally affected the Czech economy, as well. A small, open economy, dominantly linked to the EU and Germany, has suffered not only due to slow global growth but also due to developments in the automobile industry, which is a predominant export article for the Czech economy.

In 2020, a further slow-down in the economy’s growth can be expected, to approximately 2%, which will still be a solid result in the European context. The structure of growth will remain similar to that of 2019, with the predominant influence being end consumption – household consumption, supported by government expenditure. Even though leading indicators abroad improved slightly at the end of 2019, it is still too early to talk about significantly better outlooks for exports. On the other hand, domestic confidence indicators worsened at the end of the year, and the expectations are weak not only among businesses, but also among consumers.

Growth in household consumption stagnated in Q3 2019, which in combination with worsening consumer confidence indicates possible increasing risk on the domestic scene.

Despite those risks, consumer demand will continue to be supported by the strong labour market in 2020. Investment demand will remain weak in 2020, under the influence of cyclical developments and continued uncertainties in combination with relatively high costs, which will, however, be reflected in the continued slow growth in imports. That is why the contribution of net exports to Czech GDP will be likely be positive in 2020.

Expectations among industrialists at the end of 2019 were the weakest since mid-2013, with the situation in the service and construction sector being somewhat better. The growth of the economy will therefore again be driven primarily by the service sector, while industry will probably note its third year of relatively weak performance in 2020.
The labour market is responding to weakened economic performance with a lag, and at the end of 2019, it is still characterised by a surplus of jobs over the number of job seekers, which continues to generate significant pressures in terms of wage growth. It is only a matter of time before worse export performance will be reflected in the labour market. The unemployment rate bottomed out in 2019 and in 2020, and it will gradually climb to over 3%. Gradually, the surplus of the number of jobs over the number of job applicants will start to reduce, which will weaken wage dynamics. Nevertheless, wage growth of around 5% can be expected in 2020, but with a significant differentiation among professions. Inflation will most likely remain above the 2% threshold of the central bank in 2020, over which it has hovered since the end of 2016. Growth in real wages will therefore be weaker than in the previous few years. Tightening of monetary policy is not very likely in the context of a decelerating economy. Fiscal policy will support general consumption through public expense and gradually it will shift to neutral influence in terms of its position in the economic cycle.

Eva Zamrazilova – Chairwoman of the Czech Fiscal Council