CZ: Household consumption continues to drive Czech economy

Preliminary estimates indicate that Czech GDP growth reached 0.5% quarter-on-quarter. Year-on-year growth was 2.0%. Today's data confirm the gradual recovery in the Czech economy, which continued into the start of this year. Given the medium-term subdued macroeconomic developments in Germany and significant global economic uncertainties triggered by Donald Trump's trade policies, today's figures can be seen as favorable, in our view.

In its initial estimate, the Czech Statistical Office does not release detailed GDP component data. According to accompanying commentary, household consumption primarily drove year-on-year GDP growth, while foreign trade had a negative impact. Although a detailed analysis will require waiting about a month for the release of individual GDP component developments, overall, no significant changes are likely in the Czech economy, which is expected. Growth continues to be driven by revived household demand and likely government spending. Conversely, subdued developments in Germany negatively affect exports and private investments. The negative contribution from foreign trade also reflects robust growth in imports for consumption purposes.

In our main forecast scenario, we expect GDP growth to arrive at 1.7% this year, as its development will be negatively impacted by US tariffs on imports from the EU. For next year, we expect GDP growth to reach 2.1%, with the negative tariff impact partially offset by improved developments in Germany due to fiscal expansion.

Risks are bidirectional. Czech GDP growth could be slightly better this year and next, as Donald Trump and his administration may retreat from aggressive tariff policies amid significant risks to the US economy. Conversely, an escalation of the trade war cannot be ruled out. The Czech economy would likely withstand such developments, but growth rates for this year and next would hover around 1%.

Today's data do not indicate any change in the Czech economy's trajectory, so we do not anticipate a significant impact on the CNB's current stance and communication, which will likely remain cautious, continuing to emphasize the need for tight monetary policy.

The CNB meets next week and will likely decide between a 25 basis point rate cut and maintaining stability. We slightly lean towards rate stability, though the probability of a rate cut is only marginally lower, in our view. The decision may also be influenced by the preliminary April inflation estimate, released a day before the CNB meeting, which we expect to be only slightly above 2% due to the base effect.