Macroeconomic Forecast - November 2016

Dept 37 - Economic Policy Department
Dept 37 - Economic Policy Department

Published

  • Macroeconomic Forecast
  • Statistics

ISSN 1804‐7971

Summary of the Forecast

The Czech economy continues to grow dynamically. Economic performance as measured by seasonally adjusted real GDP rose by 0.9% QoQ in the second quarter. The growth thus almost matched the most successful quarters of the year 2015, which were, however, supported by several one-off factors, e.g. increased drawing from EU funds or the decline in crude oil price. In comparison with the same period of the previous year, real GDP rose by 3.6%. This figure, however, was largely influenced by the fact that the second quarter of 2016 had 3 more working days.

There has been a fundamental change in the structure of economic growth, which began to be to a dominant extent driven by foreign trade. Two factors have been reflected here – an unexpected increase in export performance and a slowdown of the growth of domestic demand.

This was due to a decline in gross fixed capital formation by 4.1%. Investment by the general government sector decreased by almost one fourth in comparison with a very high comparison base of the extraordinary year 2015. In addition to this predictable factor, private investment in fixed capital stagnated. The fall of investment in the general government sector as well as the stagnation of investment in the private sector are due to an enormous increase of investment in 2015 co-financed from EU funds from the previous financial perspective 2007–2013.

The fastest growing component of domestic demand remained private consumption (growth of 2.6%), which reflects a good income situation of households under the conditions of nearly negligible inflation. Growth of government consumption reached 2.5%.

Real gross value added increased by 3.7% YoY in the second quarter of 2016. As usual, the contribution of manufacturing was the most important one; however, all sectors except construction contributed positively to the growth.

Yet, economic growth is accompanied by low inflation. In the third quarter of 2016, consumer prices increased only by 0.5% YoY. Inflation is mainly caused by a deep decline in prices of imported goods and generally low inflation on the global scale, which predominates over little apparent demand pressures. This situation helps the growth of the real disposable income of households and subsequently also their consumption.

On the labour market, the economic boom is reflected in the dynamic development of all important indicators. Employment grew by high 1.7% YoY in the second quarter. The seasonally adjusted unemployment rate (LFS) decreased further to 3.9% in August 2016 and it has been the lowest in the EU since the beginning of 2016. Low unemployment and certain mismatches between the supply of and demand for labour are already starting to be reflected in the acceleration of growth of wages and unit labour costs.

The current account of the balance of payments has been in surplus since 2014, which has been steadily increasing. In the second quarter of 2016, it reached 1.9% of GDP (in annual terms), and was again the highest in the history of the independent Czech Republic. The surpluses on the balance of goods and services are thus already clearly exceeding the deficit of primary income, which is mostly influenced by an outflow of income from foreign direct investment in the form of dividends and reinvested earnings.

Despite the current very favourable development, the forecast for the remaining part of 2016 and 2017 has to be approached with caution.

From the perspective of the use structure of GDP, the most problematic factor seems to be the dynamics of investment. The YoY slump in gross fixed capital formation in the general government sector will probably continue until the end of 2016. In the case of private investment, however, the situation is unclear. The need to deal with frictions in the labour market is probably not a sufficient motivation to invest even in an environment of extraordinarily loose monetary conditions. Negative factors such as the high 2015 comparison base (enhanced by increased drawing from EU funds) or an increase in external risks probably dominate.

Another dampening factor will probably be the prices of crude oil and mineral fuels. They continue to remain at considerably lower levels than the levels usual in previous years. However, in the following period the tendency for their gradual slight growth should probably prevail, and thus it is possible to expect that this positive supply shock will be exhausted in the near future.

A very good condition of the economy in the second quarter of 2016, and in particular excellent results of foreign trade, lead to a slight increase in the forecast for real GDP growth from 2.2% to 2.4% in 2016 and from 2.4% to 2.5% in 2017.

The forecast for the average inflation rate remains unchanged at 0.5% in 2016 and 1.2% in 2017.

The favourable situation on the labour market results in a further decrease in the forecast for the unemployment rate (LFS) in 2016 (from 4.1% to 4.0%) as well as in 2017 (from 4.0% to 3.9%). However, we believe that at this level any further decline in unemployment hits structural limits described in Box 3.1.

There has also been a substantial improvement in the forecast for the surplus on the current account of the balance of payments, which should reach 2.3% of GDP in 2016 instead of the previously expected 1.5% of GDP. For 2017, the forecast of the current account balance was increased from 1.2% of GDP to 1.8% of GDP. Compared with the previous forecast we expect higher surpluses on the balance of goods and services. The Czech economy is thus probably becoming one of the countries with a structural surplus on the current account of the balance of payments.

From the perspective of expected tax revenues it is possible to state that the sum of changes in the forecast for the development of the most important tax bases is neutral.

 

Table: Main Macroeconomic Indicators
  2011 2012 2013 2014 2015 2016 2017 2016 2017
Current forecast Previous forecast
Gross domestic product bill. CZK 4 034 4 060 4 098 4 314 4 555 4 703 4 864 4 629 4 812
Gross domestic product growth in %, const.pr. 2,0 -0,8 -0,5 2,7 4,5 2,4 2,5 2,2 2,4
Consumption of households growth in %, const.pr. 0,3 -1,2 0,5 1,8 3,0 2,5 2,8 3,1 2,7
Consumption of government growth in %, const.pr. -2,2 -2,0 2,5 1,1 2,0 2,3 1,6 2,2 1,6
Gross fixed capital formation growth in %, const.pr. 0,9 -3,1 -2,5 3,9 9,0 -3,6 2,8 -0,6 2,8
Net exports contr. to real GDP growth, pp 1,8 1,3 0,1 -0,5 0,1 1,3 0,2 0,7 0,2
Change in inventories contr. to real GDP growth, pp 0,3 -0,2 -0,7 1,1 0,3 0,4 0,0 -0,2 0,0
GDP deflator growth in % 0,0 1,5 1,4 2,5 1,0 0,8 0,9 0,6 1,1
Average inflation rate % 1,9 3,3 1,4 0,4 0,3 0,5 1,2 0,5 1,2
Employment (LFS) growth in % 0,4 0,4 1,0 0,8 1,4 1,6 0,3 1,6 0,1
Unemployment rate (LFS) average in % 6,7 7,0 7,0 6,1 5,1 4,0 3,9 4,1 4,0
Wage bill (domestic concept) growth in %, curr.pr. 2,3 2,6 0,5 3,6 4,4 5,4 5,0 5,3 4,9
Current account balance % of GDP -2,1 -1,6 -0,5 0,2 0,9 2,3 1,8 1,5 1,2
General government balance % of GDP -2,7 -3,9 -1,2 -1,9 -0,6 -0,2 -0,2 -0,3 .
Assumptions:                    
Exchange rate CZK/EUR   24,6 25,1 26,0 27,5 27,3 27,0 26,9 27,0 26,9
Long-term interest rates % p.a. 3,7 2,8 2,1 1,6 0,6 0,4 0,6 0,6 0,8
Crude oil Brent USD/barrel 111 112 109 99 52 44 51 44 50
GDP in Eurozone (EA12) growth in %, const.pr. 1,5 -0,9 -0,3 1,0 2,0 1,4 1,1 1,5 1,2

Tables and Graphs

Preparation of the Macroeconomic Forecast


Updated: 25.07.2013

Evaluation of Forecasting History at the Ministry of Finance


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Updated: 14.11.2016

Information

  • The Macroeconomic Forecast is prepared by the Economic Policy Department of the Czech Ministry of Finance on a quarterly basis. It contains a forecast for the current and the following year (i.e. until 2017) and for certain indicators an outlook for another 2 years (i.e. until 2019). It is usually published in the second half of the first month of each quarter.
  • Any comments or suggestions that would help us to improve the quality of our publication and closer satisfy the needs of its users are welcome. Please direct any comments to the following email address: macroeconomic.forecast(at)mfcr.cz
  • Cut-off Date for Data Sources:
    The forecast was made on the basis of data known as of 13 October 2016.