Czech economy likely to grow moderately next year, wage growth to continue supporting household demand

In the third quarter of 2016, the Czech economic growth slowed to 1.9 percent year-on-year, led by subdued net exports because of weak foreign demand. As compared with an economic growth of 4.6 percent last year, this year the economic growth of Czech Republic has decelerated. This is mostly because of a temporary drop in investment co-financed from EU funds.

Jobless rate in the nation dropped further in November to 4.9 percent, the lowest level since December 2008. Accelerating wage growth and inflation gives support for the Czech central bank’s plan to exit the EUR/CZK floor in mid-2017, once inflation has reached the 2 percent target sustainably, noted Danske Bank in a research report.

The Czech economy is expected to continue to expand at similar rates in 2017. Higher inflation and less room for additional improvement in the labor market might be a drag on growth; however, these factors are likely to be countered by higher government spending before the 2017 legislative elections, with continuing wage growth underpinning household demand, according to Danske Bank.

During its monetary policy meeting in November, the Czech National Bank maintained its policy rate at 0.05 percent, while it reiterated that it projects the EUR/CZK floor to remain in place until mid-2017.  The central bank projects that the market interest rates would be flat at their current level until mid-2017 and rise after that, followed by an additional modest rise in 2018. Therefore, the Czech National Bank is likely to remain on hold at least until the second half of 2017, when it might hike rates, depending on the financial and economic repercussions from the exchange rate floor exit, added Danske Bank.