CZ: GDP growth could accelerate next year
According to the preliminary estimate, the Czech economy expanded by 0.3% quarter-on-quarter in the third quarter of this year. This data affirms the ongoing gradual recovery of the Czech economy that commenced at the end of last year. Year-on-year growth reached 1.3%, marking a notable acceleration compared to the second quarter. However, this increase is partly attributable to the lower comparative base, as GDP contracted in the third quarter of 2023, thereby reducing the benchmark against which current annual growth is measured.
The Czech Statistical Office (CZSO) does not release data on GDP components in its preliminary estimates, necessitating a wait of approximately one month for detailed figures. Nevertheless, we expect that the overall economic trajectory has remained relatively stable. Consequently, growth was likely driven predominantly by household consumption, bolstered by low inflation, real wage growth, and improved household sentiment. Conversely, inventories likely exerted a downward influence, continuing their gradual decline after previously increasing more than macroeconomic conditions would suggest. Additionally, growth was probably further constrained by foreign trade, primarily due to the weak performance of the German economy.
We anticipate GDP growth of approximately 1% for this year. Recent data should not alter this forecast, given the persistent weak external demand from the German economy. However, fixed investment is likely to increase in the fourth quarter in response to the recent floods.
A more substantial acceleration in the growth of the Czech economy is expected over the next two years, driven by an anticipated improvement in the German economy, which should enhance foreign trade and investment figures. Expansionary fiscal policy, influenced by the upcoming parliamentary elections, will also contribute to growth, alongside a significant impact from inventories. We foresee the current sharp reduction in inventories ceasing, with our forecast indicating a contribution of -1.7 percentage points to GDP growth this year and only -0.1 percentage points next year. Overall, we expect GDP growth to reach 2.7% in 2025 and 2.9% in 2026.
The Czech National Bank (CNB) is scheduled to meet at the beginning of November, with a 25bp decline in interest rates widely anticipated. This expectation is supported by relatively low inflation (in comparison to the current interest rate levels) and weak GDP growth, as the Czech economy's recovery remains sluggish and does not generate significant inflationary pressures. The recent interest rate cut in the euro area also aligns with this direction.
In our assessment, the outcome of the December CNB meeting remains uncertain, contingent on forthcoming events and data. The ECB monetary policy meeting will precede the CNB meeting, and factors such as inflation in the services sector (currently at 5% year-on-year), wage developments, and the koruna exchange rate may also influence the decision. The koruna is presently hovering close to the EUR/CZK 25.4 level, having been at approximately EUR/CZK 25.0 a few weeks ago. In our view, this depreciation is attributed to external factors, primarily shifts in market expectations regarding future Federal Reserve policy and an increased probability of a D. Trump victory in the US election. This weakening could correspond to a CNB rate cut of approximately 30-35 basis points. In essence, the easing of monetary conditions in the Czech economy has thus already occurred due to the koruna's depreciation, which the CNB may consider. Conversely, data from the German economy and the recent decline in fuel prices exert an opposite effect, heightening the risk of a potential rate cut at the December meeting as well.
Today's data is unlikely to significantly impact the koruna. The currency is currently influenced mainly by external factors, a trend expected to continue in the coming weeks unless the CNB delivers an unexpected decision in November.