CZ: Upward revision of GDP

New Czech GDP data revealed an unexpected revision. Quarter-on-quarter growth for the first quarter of this year was revised from 0.5% to 0.8%, and year-on-year growth from 2.0% to 2.2%. Growth is primarily driven by household consumption, positively influenced by a strong labor market, low inflation, and improved consumer sentiment. Conversely, foreign trade is negatively impacted by subdued developments in the German economy. Today's upward revision may have been influenced by US tariffs, as efforts to stockpile in the US could have led to higher Czech export growth than macroeconomic trends would suggest.

In the first quarter, export volumes rose significantly by 2.8% quarter-on-quarter. Such strong growth may not reflect cyclical trends but could be driven by US importers' efforts to stockpile goods ahead of increased tariffs. This might be followed by a decline in exports in the second quarter. Inventories (1.2pp to GDP growth) also contributed significantly, likely motivated by concerns over potential deterioration in foreign trade conditions. In line with strong growth in inventories and exports, import volumes into the Czech economy also increased. From a medium-term perspective, household and government consumption drive GDP growth, while foreign trade acts in the opposite direction.

In our current forecast, we anticipate Czech GDP growth of 1.7% this year, with gradual acceleration to 2.1% and 2.6% over the next two years. Economic improvement in the coming years is expected to be driven primarily by increased foreign demand for Czech exports, alongside the anticipated recovery in the German (and European) economy.

We are currently updating our forecast. Recent data suggest slightly higher GDP growth for this year, around 1.9-2.0%. This is due to a better-than-expected first quarter and the postponement of US reciprocal tariffs by Trump shortly after their introduction (we had instead expected gradual reductions as negotiations progressed). Conversely, if the frontloading hypothesis is confirmed, the strong first-quarter growth may not significantly impact annual GDP.

Today's data may not significantly impact CNB policy. Inflationary trends continue in several sectors of the Czech economy, such as the labor market and services, likely keeping the CNB cautious in line with its communication. We anticipate the next rate cut in November. Uncertainty remains elevated on both sides, as the economic cycle on one hand and the majority of the board's perception of the neutral rate level on the other will be crucial.