Czech economic growth likely to remain slightly below 3 pct, headline inflation to stay high

The Czech economy had grown 0.4 percent quarter-on-quarter and 2.5 percent year-on-year in the third quarter. Among GDP components, the most significant remained household consumption, mostly because of the solid labor market. Moreover, foreign demand and government consumption added considerably to the GDP growth. Meanwhile, the development of investment expenditures was comparatively weak, mainly because of the negative confidence linked with Brexit and the development of the Germany economy.

The overall economic story is expected to persist in the next two years, according to an Erste Group Research report. Pressure in the labor market might ease just slightly, and therefore household consumption might remain the key contributor to GDP growth. Nevertheless, it might decelerate slightly, as the real wages growth is expected to soften.

“On the other hand, the slightly lower growth of domestic demand will be offset by expected improvements in investment expenditures and foreign demand”, stated Erste Group Research.

Meanwhile, inflation is expected to stay relatively high. Headline inflation remains above the target and close to the upper bound of the tolerance band. The most significant inflationary drivers are the tight labor market, domestic demand and the rise of food prices.

“As we expect these factors to ease only gradually, headline inflation will stay above the target not only for the rest of this year, but also in the next one. However, in 2020, headline inflation should be closer to the target compared with this year, which will be affected by lower growth of real wages and the renewed koruna appreciation”, added Erste Group Research.