Macroeconomic Forecast - July 2018

Dept 37 - Economic Policy
Dept 37 - Economic Policy

Published

  • Survey
  • Macroeconomic Forecast

ISSN 2533-5588

Introduction and Summary of the Forecast

Growth in the global economy remains stable and robust, but global uncertainties and risks are growing sharply. They concern not only the consequences of a massive fiscal stimulus in the United States, but also - despite the approaching date of withdrawal - the new conditions for relations between the United Kingdom and the European Union. In addition, the price of oil has reached its four-year maximum. Moreover, the future of world trade is of a great concern.

In 2017, economic growth in both the euro area and the European Union was the strongest in the past 10 years, but it slowed down somewhat in early 2018. Although it is generally believed that this slowdown is due to various one-off factors, confidence indicators have not yet reversed. However, fundamental factors still remain positive. Euro area economies can benefit from relaxed financial conditions that reduce the cost of funding for the private and public sectors. The declining unemployment and lower household indebtedness are promising in terms of the future dynamics of private consumption. Similar evaluation - healthy fundamentals and increased uncertainty - also applies to the Czech economy.

Year-on-year growth of real gross domestic product slowed to 3.4% in Q1 2018. In the quarter-on-quarter comparison (adjusted for seasonal and calendar effects), the economic growth also decelerated slightly, to 0.5%.

Traditionally, the most robust component of use was household consumption. It was up by 4.0% YoY, marking the fifth consecutive quarter with growth of at least 4%. The consistently high dynamics reflects not only wage and salary increases, but also a decline in the savings rate that reflects the labour market situation, low interest rates, and confidence of consumers in further developments. Consumption of the general government sector increased by 3.2%.

Growth in fixed capital investment accelerated sharply to 8.1% in Q1. The bulk of the increase was related to construction investment, including investment in dwellings. However, growth was seen in all categories of investment. From the sectoral perspective, high investment activity was driven mainly by private investment. Gross capital formation (including the change in inventories) even reached double-digit growth (10.0%).

In Q1 2018, the contribution of foreign trade in goods and services to economic growth was deeply negative (-1.3 pp). This reflected not only an increase in imports, due in particular to the high import intensity of investments, but also - on the export side - the combined effects of a stronger koruna and probably a one-off quarter-on-quarter drop in German imports and exports.

Good economic situation should continue for the rest of 2018 and into 2019, although with slowing dynamics. The economic growth should continue to be driven by household consumption reflecting strong wage dynamics amid an extremely low unemployment rate, increasing participation rate and a very high number of job vacancies. Investment should be stimulated not only by money from the European Structural and Investment Funds, the need of the private sector to innovate technological equipment while coping with labour market imbalances, but also by decreasing relative cost of capital to the cost of labour at still low real interest rates. Rising uncertainties outside the Czech economy should then negatively affect the balance of foreign trade.

Therefore, the forecast for real GDP growth is slightly reduced from 3.6% to 3.2% for 2018 and from 3.3% to 3.1% for 2019.

Since the beginning of 2017, the year-on-year growth in consumer prices hovers, with a few exceptions, in the upper half of the tolerance band of the Czech National Bank's 2% inflation target. Given the inflationary effects of wage and salary increases, positive output gap and higher koruna prices of oil, it can be expected to stay at this level until mid-2019. The forecast for the average inflation rate thus rises from 2.1% to 2.2% for 2018, and from 1.9% to 2.3% for 2019.

High employment growth, which has steadily exceeded 1% since the end of 2014, has exhausted pretty much all unused resources in the labour market. Lack of employees is thus becoming a barrier for an extensive production growth, which motivates companies to invest with a view to raise labour productivity. The scope for a further decrease in unemployment appears to be quite limited. Given the developments in Q1, the forecast for the unemployment rate for 2018 is slightly decreased from 2.4% to 2.3%, while for 2019 it is kept at 2.3%.

The current account of the balance of payments has been in a very small surplus since 2014. However, the positive balance of goods has been gradually decreasing as a result of higher domestic demand for imports driven by both consumption and investment growth. In the near future, this will also likely include the impact of the rising oil prices and uncertainties in world trade. We therefore expect the current account balance to go from a surplus to a slight deficit that could reach 0.3% of GDP in 2018 and 0.2% of GDP in 2019.

The general government sector was in a record surplus of 1.6% of GDP in 2017. The structural balance increased to 1.1% of GDP, also a historical maximum. Despite faster growth in final consumption expenditure of the general government sector, mainly in compensation of employees, the current forecast for the general government surplus for 2018 remains at 1.5% of GDP. The increase in expenditure should be offset by higher tax revenues, including social security contributions. We expect the debt of the general government sector to fall to 33% of GDP.

 

Main Macroeconomic Indicators
  2013 2014 2015 2016 2017 2018 2019 2017 2018 2019
Current forecast Previous forecast
Gross domestic product bill. CZK 4 098 4 314 4 596 4 768 5 045 5 300 5 589 5 055 5 320 5 596
Gross domestic product growth in %, const.pr. -0,5 2,7 5,3 2,5 4,3 3,2 3,1 4,4 3,6 3,3
Consumption of households growth in %, const.pr. 0,5 1,8 3,7 3,6 4,3 4,3 3,9 4,0 4,3 4,1
Consumption of government growth in %, const.pr. 2,5 1,1 1,9 2,7 1,3 2,1 2,0 1,5 1,9 2,0
Gross fixed capital formation growth in %, const.pr. -2,5 3,9 10,2 -3,1 3,3 7,5 3,2 5,4 5,7 4,4
Net exports contr. to GDP growth, pp 0,1 -0,5 -0,2 1,4 1,1 -0,7 0,1 1,0 -0,2 -0,1
Change in inventories contr. to GDP growth, pp -0,7 1,1 0,8 -0,4 0,1 -0,4 0,0 -0,1 0,0 0,0
GDP deflator growth in % 1,4 2,5 1,2 1,3 1,5 1,8 2,3 1,4 1,5 1,8
Average inflation rate % 1,4 0,4 0,3 0,7 2,5 2,2 2,3 2,5 2,1 1,9
Employment (LFS) growth in % 1,0 0,8 1,4 1,9 1,6 1,3 0,2 1,6 0,7 0,2
Unemployment rate (LFS) average in % 7,0 6,1 5,1 4,0 2,9 2,3 2,3 2,9 2,4 2,3
Wage bill (domestic concept) growth in %, curr.pr. 0,5 3,6 4,8 5,7 8,2 9,3 8,3 8,3 7,7 6,5
Current account balance % of GDP -0,5 0,2 0,2 1,6 1,1 -0,3 -0,2 1,1 0,4 0,2
General government balance % of GDP -1,2 -2,1 -0,6 0,7 1,6 1,5 . 1,6 1,5 1,1
Assumptions:                      
Exchange rate CZK/EUR   26,0 27,5 27,3 27,0 26,3 25,6 25,2 26,3 25,1 24,7
Long-term interest rates % p.a. 2,2 1,4 0,6 0,4 1,0 2,1 2,5 1,0 1,9 2,2
Crude oil Brent USD/barrel 109 99 52 44 54 73 72 54 65 61
GDP in Eurozone growth in %, const.pr. -0,2 1,3 2,1 1,8 2,4 2,2 1,8 2,3 2,3 1,8

 

Tables and Graphs

Preparation of the Macroeconomic Forecast

Updated: 25.07.2013

Evaluation of Forecasting History at the Ministry of Finance

To run, the application requires Microsoft Excel 2010 or Microsoft Excel 2007. Macros need to be enabled.
Updated: 31.7.2018

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 2019) and for certain indicators an outlook for another 2 years (i.e. until 2021). 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 11 July 2018.