Macroeconomic Forecast - January 2018

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

Published

  • Macroeconomic Forecast
  • Statistics

ISSN 2533-5588

Summary of the Forecast

The growth of the global economy is exceeding previous expectations. In 2017 the economies of the Euro Area and the EU as a whole probably reached the highest rate of economic growth in a decade. It takes advantage of the improving labour market situation, an unprecedented high level of confidence of economic agents and the resulting robust household consumption. The US and Chinese economies have also achieved very good results. Although a moderate slowdown in dynamics is expected for this year in most cases, growth prospects remain very promising.

Favourable developments of the main trading partners and a stable situation within the Czech economy, characterized by increased confidence, create conditions for further successful continuation of the economic boom in the Czech Republic. It is positive that the dynamic growth takes place in the conditions of a surplus of the general government balance and the current account of the balance payments. We consider the situation in the labour market, which shows signs of overheating, to be the main barrier for a higher growth of the Czech economy.

The real gross domestic product increased by 4.7% YoY in the third quarter of 2017, at the highest rate since the fourth quarter of 2015. At that time, however, the economy was greatly stimulated by the end of the EU projects’ previous financial perspective. After seasonal and calendar adjustment (the third quarter 2017 had 1 working day more YoY), the growth was even 5.0%, though in comparison with the previous record-breaking quarter it slowed down to 0.5%.

Traditionally, the most significant component of use was household consumption. It increased by 4.1% YoY, not only due to high dynamics of the wage bill, but also to declining savings rate, which reflects situation in the labour market, low interest rates and high consumer confidence in future developments. The economy was also supported by a YoY increase in the general government consumption by 1.2%.

Growth of investment in fixed capital, which accelerated to 6.3% in the third quarter, was mostly driven by investment in machinery, equipment (excluding transport), and information and communication technologies. The greatest dynamic (10.9%) was recorded in investment in housing, which reflects the high demand. In sectoral terms, the investment activity was driven by private investment. Investment by the general government sector was stagnant.

The contribution of foreign trade to economic growth slightly decreased to 0.4 pp. Net exports were supported by increasing external demand on the one hand, but also reflected a high import intensity of investment.

The positive economic situation should continue also in 2018. Growth should still be driven by household consumption, reflecting the dynamics of wages against the background of an extremely low unemployment rate, high participation rate and record-breaking number of job vacancies. Household consumption will be further supported by an increase in salaries in the general government sector, reduced tax burden on families with children, and growth in social security spending. Investment should be stimulated not only by the European Structural and Investment Funds but also by decreasing relative cost of capital to the cost of labour at still low real interest rates.

The very good condition of the Czech economy and of the external environment leads to an increase in the estimate of gross domestic product growth in 2017 from 4.1% to 4.3% and the forecast for 2018 from 3.3% to 3.4%. Due to the assumed marginal weakening of economic growth in the Euro Area, tighter monetary conditions and the situation in the labour market, real GDP growth should slow down to 2.6% in 2019.

Since the end of 2016, the YoY growth in consumer prices hovers, with a few exceptions, in the upper half of the tolerance band of the Czech National Bank’s inflation target. We expect that inflation will be above 2% also this year and for the most part of the next year. Pro-inflationary effects of higher crude oil prices, wage increases and a positive output gap should outweigh anti-inflationary effects stemming from the expected tightening of monetary conditions.

The average inflation rate in 2017 was 2.5%. We are increasing our forecast for 2018 from 2.4% to 2.6%, and we expect an average consumer prices growth of 2.1% in 2019.

A high employment growth, which has steadily exceeded 1% since the end of 2014, exhausts unused resources in the labour market. The seasonally adjusted unemployment rate decreased further to 2.5% in November 2017. Lack of employees is thus becoming a barrier for an extensive production growth, which motivates companies for investment increasing labour productivity.

The room for a further reduction in the unemployment rate is apparently highly limited, but based on the estimate of the level reached in 2017 (2.9%) we are lowering the forecast for the average unemployment rate in 2018 from 2.8% to 2.4%. We expect an unemployment rate around 2.3% in 2019.

The current account of the balance of payments had a surplus of 0.6% of GDP in the third quarter of 2017. The positive balances of goods and services exceed 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. The current account surplus has tended to decline since mid-2016, mainly due to higher domestic demand for imports generated by growing consumption and investment.

The forecast for the current account surplus (after estimated 0.5% for 2017) is lowered for 2018 from 0.5% of GDP to an almost balanced level of 0.1% of GDP, which should be achieved also in 2019.

We keep the estimate for the general government balance in 2017 unchanged at 1.1% of GDP. Surplus cash performance of local government budgets and health insurance companies contributed positively to the overall result. There was also a significant YoY improvement at the level of the state budget, whose cash balance adjusted for the impact of EU projects and financial mechanisms was better by CZK 12.3 billion in comparison with 2016, and therefore almost balanced. The forecast for the general government surplus in 2018 remains at the level of 1.3% of GDP. The debt of the general government sector should decrease to 34.6% of GDP at the end of 2017, and continue in this declining trend also in 2018, to 33.1% of GDP.

 

 

 

Main Macroeconomic Indicators
  2013 2014 2015 2016 2017 2018 2019 2017 2018
Current forecast Previous forecast
Gross domestic product bill. CZK 4 098 4 314 4 596 4 773 5 042 5 304 5 530 5 024 5 299
Gross domestic product growth in %, const.pr. -0,5 2,7 5,3 2,6 4,3 3,4 2,6 4,1 3,3
Consumption of households growth in %, const.pr. 0,5 1,8 3,7 3,6 4,0 3,7 2,7 3,9 3,5
Consumption of government growth in %, const.pr. 2,5 1,1 1,9 2,0 1,9 1,8 1,5 1,9 1,7
Gross fixed capital formation growth in %, const.pr. -2,5 3,9 10,2 -2,3 5,6 4,1 3,4 6,2 4,1
Net exports contr. to real GDP growth, pp 0,1 -0,5 -0,2 1,2 1,0 0,2 0,1 0,9 0,3
Change in inventories contr. to real GDP growth, pp -0,7 1,1 0,8 0,0 -0,3 0,0 0,0 -0,5 0,0
GDP deflator growth in % 1,4 2,5 1,2 1,2 1,3 1,8 1,7 1,1 2,1
Average inflation rate % 1,4 0,4 0,3 0,7 2,5 2,6 2,1 2,4 2,4
Employment (LFS) growth in % 1,0 0,8 1,4 1,9 1,6 0,6 0,2 1,4 0,4
Unemployment rate (LFS) average in % 7,0 6,1 5,1 4,0 2,9 2,4 2,3 3,0 2,8
Wage bill (domestic concept) growth in %, curr.pr. 0,5 3,6 4,8 5,8 7,9 7,7 4,9 7,4 7,6
Current account balance % of GDP -0,5 0,2 0,2 1,1 0,5 0,1 0,1 0,6 0,5
General government balance % of GDP -1,2 -1,9 -0,6 0,7 1,1 1,3 . 1,1 1,3
Assumptions:                    
Exchange rate CZK/EUR   26,0 27,5 27,3 27,0 26,3 25,4 25,0 26,4 25,5
Long-term interest rates % p.a. 2,1 1,6 0,6 0,4 1,0 1,7 2,0 0,9 1,5
Crude oil Brent USD/barrel 109 99 52 44 54 68 64 53 55
GDP in Eurozone growth in %, const.pr. -0,2 1,3 2,1 1,8 2,4 2,3 1,9 2,1 2,0

 

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: 31.1.2018

Information

  • The Macroeconomic Forecast is prepared by the Economic Policy Department of the Czech Ministry of Finance. It contains a forecast for the current and the following year (i.e. until 2018) and for certain indicators an outlook for another 2 years (i.e. until 2020). It is published on a quarterly basis (usually in January, April, July and November).
  • 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 15 January 2018.