CZ: GDP growth could accelerate this year

According to a preliminary estimate, the Czech economy expanded by 0.5% quarter-on-quarter in Q4 of last year, with year-on-year growth reaching 1.6%. For the entire year, the Czech economy grew by 1%.

Overall, we view the current cyclical development of the Czech economy as broadly stable. The economy is experiencing a gradual recovery, driven by household and government consumption, as well as foreign trade. Conversely, investment trends and weak demand from Germany are exerting downward pressure.

While detailed GDP component data are not yet available, we do not anticipate significant changes. GDP growth is primarily driven by household consumption, supported by lower inflation, rising real wages, and improved consumer sentiment, along with government consumption and car production (foreign trade). Conversely, the reduction of previously over-accumulated inventories and weak demand from Germany have a negative impact.

This year, the growth of the Czech economy is expected to accelerate and slightly exceed 2%. Growth will continue to be driven primarily by consumption and foreign trade, and we anticipate a halt in inventory declines this year. Conversely, the weak performance of the German economy will continue to exert downward pressure. Risks remain elevated and skewed towards lower Czech GDP growth.

Today's data are unlikely to have a significant impact on CNB monetary policy or the koruna's trajectory, as they did not present any major surprises.

The CNB meets on Thursday (February 6) and following the unexpectedly low December inflation (-0.3% month-on-month), we see a 25-basis-point rate cut as the most likely scenario. However, this is not certain, as the preliminary January inflation figure, also due on February 6 shortly before the CNB meeting, will likely be decisive.

Overall, we expect three rate cuts this year (February, August, and November) and an additional cut next year. We see risks as balanced; on one hand, anti-inflationary trends in Germany could intensify, prompting the CNB to lower rates more quickly, while on the other hand, a scenario where the CNB halts gradual rate cuts at a higher level (3.25% or 3.50%) cannot be ruled out.