CZ: GDP growth driven by household consumption

According to a revised estimate, the Czech economy grew by 0.7% quarter-on-quarter in the fourth quarter of last year, an upward revision from the preliminary estimate of 0.5%. Other quarters of 2024 were also slightly revised. However, the overall economic growth for the entire last year remained at 1%. Today's data do not change our overall view of the Czech economy, which is undergoing a gradual recovery. This recovery is primarily driven by household and government consumption, as well as foreign trade. Conversely, investment developments and weak demand from Germany exert downward pressure.

This year, the Czech economy could grow by around 2%, primarily driven by the continued recovery in household consumption. Over the next two years, GDP growth is expected to strengthen further (2.6 and 2.7% in 2026 and 2027, respectively), mainly due to developments in fixed investments and exports, both responding to (expected) improved foreign demand and, in the case of investments, to further CNB rate cuts.

We see risks as significant and skewed to the downside. If a trade war between the US and the EU occurs, Czech economic growth could be about half a percentage point lower, depending on the scope and magnitude of tariffs and their timing. The economic situation in Germany remains another risk, especially in the event of a delayed recovery.

Today's data are unlikely to have a significant impact on CNB monetary policy or the koruna's trajectory. The slight data revision does not change our overall view of economic development and should not imply a significant shift in monetary policy settings. Czech economic growth is currently driven primarily by household consumption, which is pro-inflationary, suggesting that the CNB will likely remain cautious.

The CNB meets on March 26 and will likely decide between maintaining stable rates and a slight 25-basis-point cut. At this point, we slightly lean towards rate stability, though a rate cut would not be a major surprise. We currently see the probability of both options as relatively similar, with macro data (particularly wages, inflation, and the koruna) and other events (trade tariffs, developments in Germany) in the coming weeks potentially being decisive.

For the remainder of this year, we anticipate two more CNB rate cuts (August and November), followed by an additional cut next year. The CNB could thus stop at 3% (in terms of its key rate). We see risks as balanced. On one hand, the subdued developments in Germany could worsen further if a trade war between the US and the EU occurs, likely prompting the bank board to lower rates more quickly. On the other hand, a scenario where the CNB delivers a smaller overall rate cut and ends the gradual reduction at 3.25% or 3.50% cannot be ruled out. Some board members have previously indicated that they perceive the neutral rate to be above 3%, making this scenario plausible.

The precise timing may also depend on the monthly inflation data, which can vary from month to month. Currently, we expect an inflation rate close to 2% for April. Although inflation is expected to strengthen again during the summer, such a low figure, if realized, could "convince" the bank board to cut rates as early as May (the CNB meets on May 7, with inflation data released on May 6).