CZ: GDP growth may accelerate next year

The refined estimate for third-quarter GDP growth showed a slight adjustment, with quarter-on-quarter growth revised up by 0.1pp to 0.4%. However, this was offset by a minor downward revision to the second-quarter data. The annual growth rate of 1.3% for the third quarter remained unchanged. Today's figures confirm the gradual recovery underway in the Czech economy. A 0.4% growth rate could be seen as relatively favorable, particularly given the subdued conditions in Germany, which continue to constrain the Czech economy.

The first estimate of GDP components was released today, aligning with previous trends and leaving the overall narrative largely unchanged. Growth is primarily driven by household consumption, bolstered by falling inflation, real wage growth, and improved sentiment. Government consumption and foreign trade also contribute positively. However, the (positive) contribution from foreign trade has recently declined, reflecting weak demand from Germany and a recovery in imports for consumption. Additionally, inventories, which have been excessively accumulated in recent years and are gradually declining this year despite quarter-on-quarter volatility, are still exerting a significant negative impact.

We anticipate GDP growth of approximately 1% this year. The risks are balanced, with ongoing weak performance in Germany on one side and the potential for stronger investment, particularly related to flood repairs, on the other. A more significant acceleration in the growth of the Czech economy is anticipated next year (2.3%), alongside an improvement in external demand.

The situation in the US, particularly the potential introduction or increase of tariffs on European exports, poses a significant risk. This could extend to automobiles, significantly impacting Czech industry. This risk could reduce Czech GDP growth by about half a percentage point, bringing it down to 1.7-1.8% from 2.3%, in our view. However, the actual impact will depend on the level and scope of the tariffs.

Today's data are unlikely to significantly impact the CNB's monetary policy, as they did not present any major surprises.

We anticipate the CNB rates to remain stable in December, though the overall situation remains highly uncertain. The final decision may be influenced by the ECB meeting on December 12, initial signals regarding the new US administration's plans, the development of the koruna, and the November inflation figure. If the koruna remains weak and November inflation rises to 3%, as we expect, the likelihood of maintaining steady rates would increase. The market is also now leaning towards rate stability.

Currently, we do not foresee the next rate cut until the May meeting, while the market anticipates February. Overall, we expect only very gradual rate cuts towards the 3% level over the next two years.