CZECH ECONOMY TO GROW BY 2% THIS YEAR SAYS A NEW FINANCE MINISTRY PREDICTION

CZECH ECONOMY TO GROW BY 2% THIS YEAR SAYS A NEW FINANCE MINISTRY PREDICTION

On Tuesday 4 February, the Ministry of Finance issued a new macroeconomic prediction. It expects the country’s real GDP to grow by 2% compared to 2019. The growth estimate remains unchanged, compared to the previous prediction published in November. “Our view of the development of the Czech economy has remained principally unchanged. We estimate that real GDP was up by 2.5% in 2019. We are also keeping to the prediction of a deceleration of the economy to 2.0% in 2020, due to the weaker dynamism of domestic demand. In 2021, we are expecting GDP to grow by 2.2%, thanks to a gradual revival abroad,” said the Ministry.

Other parameters of the prediction remained largely unchanged, as well. A shift by 0.2 percentage points did, however, occur in the estimated consumer price level. Whereas in November, the Ministry had estimated an average inflation of 2.6% for 2020, it now estimates as much as 2.8%. “In November 2019, the year-on-year growth in consumer prices popped out of the tolerance band of the 2% inflation target of the Czech National Bank, for the first time since October 2012. The pro-inflation effects of a positive production gap and the increase in labour unit costs are magnified by administrative measures and growth in food prices. With the exception of the latter, the impact of the factors should gradually wane in the upcoming period. That is why a gradual approximation of the inflation level to its target can be expected. Due to price developments at the end of last year and expected oil prices, we are increasing our prediction of the average inflation level in 2020 to 2.8%, and in 2021 we expect inflation of 2.2%,” wrote the authors of the prediction.

According to the prediction, unemployment should reach 2.2% this year, the volume of wages and salaries should be up by 6.1%. That is a rate 0.2 percentage points faster than was expected by the November prediction.

As for risks, the Ministry continues to state that they are deflected downwards, in particular with a view to developments abroad. “Compared to the previous macroeconomic prediction, the intensity of downward risks has decreased,” says the prediction. The most significant risks it lists include tensions in trade relations between the US and China and the development of sentiment indicators in many eurozone countries. Given the deadline for data sources for the new prediction, which was on 14 January 2020, with the selected bases being related to 6 January, the prediction was, on the other hand, not able to take into account the potential economic effects of the coronavirus epidemic in China. They could affect the Czech Republic indirectly, through Germany, for which China is the largest trading partner.