This week, the Ministry of Finance upgraded their forecast for economic growth in the Czech Republic to 3.2% this year, and 4.2% in 2022, driven by returning demand after the economic slowdown of the coronavirus pandemic. Photo Credit: Vlada.cz.
Czech Rep., Aug 26 (BD) – The Ministry of Finance has this week released an updated Macroeconomic Forecast for the Czech Republic for 2021 and 2022. Growth forecasts for both years have been revised upwards, in light of the economic recovery from the coronavirus shock, predominantly driven by returning demand.
The Czech economy was significantly affected by the pandemic and measures taken to prevent its spread, with a deep economic downturn reaching 5.8% of GDP in 2020. However, according to Michal Žurovec, a spokesman for the Finance Ministry, the improvements in the epidemiological situation and the related relaxation of anti-epidemic restrictions are now driving an economic recovery, not only in the Czech Republic but also abroad. The Finance Ministry is therefore now predicting GDP growth of 3.2% in 2021, driven by all components of domestic demand, mostly investment and household consumption. 2022 should see growth accelerate to 4.2% due to the continuing recovery in private consumption.
“On the other hand, there are also significant inflationary pressures in the economy,” said Žurovec. “High energy and other commodity prices are gradually being reflected in other price areas, including consumer prices. Therefore, for 2021 Therefore, for 2021 we have increased the forecast of the average inflation rate to 3.2%, and for 2022 to 3.5%, which is above the tolerance band for the Czech National Bank’s inflation targets.”
Meanwhile, the labor market is still seeing positive trends. Although most fiscal stimulus measures related to the pandemic have ended, this has been offset by the positive effect of anti-epidemic restrictions being eased, and strong labor demand in some sectors, especially industry, meaning no rise in unemployment. However, according to the Labor Force Survey, the average unemployment rate is expected to increase to 3.0% in 2021 due to the delayed effects of the economic downturn, before coming back down to 2.7% in 2022 as the economic recovery continues.
Government spending in 2021 has been heavily burdened, not only by the coronavirus epidemic itself, and its economic consequences, but also by public health measures and fiscal stimulus policies. The Ministry is forecasting a deficit of 7.7% of GDP this year, and an increase in public debt to 43.5% of GDP. According to Žurovec, “in 2022, neither the economy nor the balance of public finances should be affected by the effects of the epidemic. With the economic consolidation started, we estimate that the deficit will reach 5.0% of GDP and the debt will increase to 46.2% of GDP.”
However, there are several factors that may affect the economic performance of the Czech Republic during this period, compared to the forecasts. The main negative risk factor is the development of the epidemic situation, especially the effectiveness of vaccines against possible new coronavirus mutations. It will also be necessary to balance demand and supply in the labor market, in the context of possible structural changes in the economy. Other internal risks include uncertainty in the automotive industry and the overvaluation of residential property prices.
On the other hand, the drop in household consumption during the pandemic could be described as a “positive risk”, as when households begin spending again, this could further accelerate economic growth, with a positive effect on the labor market, an increase in productivity-enhancing investments, and wage growth.
