Macroeconomic Forecast - April 2019

Dept 37 - Economic Policy
Dept 37 - Economic Policy

Published

  • Macroeconomic Forecast
  • Statistics

ISSN 2533-5588

Introduction and Summary

Global economic expansion continues, though it is gradually losing momentum and downward risks are extending significantly. Forecasts of economic growth are decreasing for almost all the world’s largest economies, especially for the euro area countries. That result is largely due to increased political uncertainty, continued tensions in international trade and further reductions in business and consumer confidence. For the time being, however, a recession is not forecasted in any of the world’s largest economies, which is good news.

Climax of the process of the United Kingdom’s withdrawal from the European Union is the crucial source of uncertainty. Given that the lower chamber of the British Parliament has not approved the withdrawal agreement, the brexit date has been postponed to 12 April 2019, in line with conclusions of the European Council. As of the cut-off date of the forecast, a majority support has not been found in the British parliament for any of the proposals that would then predetermine future relationships between the UK and the EU. The risk that there will be a no-deal “hard brexit” on 12 April has thus increased significantly. This forecast is based on the assumption that the UK will not leave the EU without an approved withdrawal agreement, i.e. that a “hard brexit” will be avoided.

Developments in the Czech economy were relatively favourable in Q4 2018, despite a rather negative impact of the external environment. After adjustment for seasonal and calendar effects, the growth in real gross domestic product accelerated to 0.8% QoQ and 2.6% YoY.

In the year-on-year perspective and in terms of components of domestic use, investment in fixed capital posted the most dynamic growth, of 10.9%. In that segment, not only investments in residential and non-residential construction but also investments in machinery and equipment achieved a double-digit growth.

From the sectoral perspective, investment activity of the general government accelerated significantly. A real increase of more than 35% was driven by domestic investments and projects co-funded from the European Structural and Investment Funds. Private investments also showed high dynamics exceeding 7%.

Household consumption growth slowed down to 2.4%. In the conditions of high dynamics of the wage bill it reflected not only higher consumer inflation but also a significant increase in the savings rate. Consumption of the general government increased by 3.6%, driven mainly by employment and intermediate consumption.

In Q4 2018, the contribution of foreign trade was only slightly negative. On the export side, increased export performance led to an accelerated export growth. Import growth remained dynamic mainly due to high import intensity of investments.

With respect to expected deterioration of the external environment, the forecast for economic growth in 2019 was revised down from 2.5% to 2.4%. The most important growth factor should be household consumption, which should reflect continued robust wage dynamics at an extremely low unemployment rate and a sharp increase in pensions. Investments in fixed capital and general government consumption should contribute to the growth positively, although to a lesser extent than in 2018, whereas the contribution of foreign trade should remain negative. The forecast for economic growth in 2020 remains unchanged at 2.4%.

Since the beginning of 2017, the year-on-year growth in consumer prices has been hovering mostly in the upper half of the tolerance band of the Czech National Bank’s 2% inflation target. It should remain there also for most of 2019. Pro-inflationary effects of growth in wages and salaries and of a positive output gap should continue to act but with a gradually decreasing intensity. We slightly increase the forecast for inflation rate in 2019, due to higher expected crude oil prices, from 2.1% to 2.3%, and we continue to expect inflation to be at 1.6% in 2020.

In Q4 2018, employment growth returned above the 1% threshold but this rate cannot be maintained in the future due to an extremely low unemployment and demographic factors. Lack of employees is a primary barrier to further extensive production growth, which motivates companies, mostly large ones, to make investments increasing labour productivity. We consider the space for a further decline in unemployment almost exhausted, and therefore maintain the forecast for the unemployment rate in 2019 and 2020 at 2.2%.

As regards the current account of the balance payments, the positive balance of goods has gradually been decreasing as a result of higher domestic demand for imports influenced by an increase in investments and consumption. This factor is being accompanied by the impact of uncertainties in world trade. The remaining items of the current account should more or less stagnate or improve only slightly. The result should be a small surplus of 0.2% of GDP in 2019 and 0.3% of GDP in 2020.

The general government balance reached a surplus of 0.9% of GDP in 2018, or 0.4% of GDP in structural terms. The year-on-year change in the budget performance was to a large extent determined by expenditures, whose dynamics of more than 10% exceeded the growth in revenues by more than 2 pp. The budget surplus is also reflected in the level of total indebtedness, which decreased by 2 pp YoY to 32.7% of GDP. The budget is forecasted to post a surplus (0.3% of GDP) also in 2019, while the debt-to-GDP ratio is expected to decrease further to 31.5%. 

 

Main Macroeconomic Indicators
  2014 2015 2016 2017 2018 2019 2020 2018 2019 2020
Current forecast Previous forecast
Gross domestic product bill. CZK 4 314 4 596 4 768 5 047 5 304 5 595 5 839 5 313 5 590 5 823
Gross domestic product growth in %, const.pr. 2,7 5,3 2,5 4,4 2,9 2,4 2,4 2,8 2,5 2,4
Consumption of households growth in %, const.pr. 1,8 3,7 3,6 4,3 3,2 2,9 2,8 3,5 3,3 3,0
Consumption of government growth in %, const.pr. 1,1 1,9 2,7 1,3 3,7 2,2 1,9 3,8 2,1 1,9
Gross fixed capital formation growth in %, const.pr. 3,9 10,2 -3,1 3,7 10,5 3,1 2,7 8,8 3,1 2,7
Net exports contr. to GDP growth, pp -0,5 -0,2 1,4 1,1 -0,7 -0,3 0,0 -0,6 -0,3 -0,1
Change in inventories contr. to GDP growth, pp 1,1 0,8 -0,4 0,1 -1,2 0,0 0,0 -1,1 0,0 0,0
GDP deflator growth in % 2,5 1,2 1,3 1,4 2,1 3,0 1,9 2,4 2,6 1,7
Average inflation rate % 0,4 0,3 0,7 2,5 2,1 2,3 1,6 2,1 2,1 1,6
Employment (LFS) growth in % 0,8 1,4 1,9 1,6 1,4 0,4 0,2 1,3 0,3 0,2
Unemployment rate (LFS) average in % 6,1 5,1 4,0 2,9 2,2 2,2 2,2 2,3 2,2 2,2
Wage bill (domestic concept) growth in %, curr.pr. 3,6 4,8 5,7 8,3 9,3 7,5 5,9 9,6 7,7 6,3
Current account balance % of GDP 0,2 0,2 1,6 1,7 0,3 0,2 0,3 0,3 0,3 0,2
General government balance % of GDP -2,1 -0,6 0,7 1,6 0,9 0,3 . 1,6 1,0 .
Assumptions:                      
Exchange rate CZK/EUR   27,5 27,3 27,0 26,3 25,6 25,5 25,1 25,6 25,5 25,1
Long-term interest rates % p.a. 1,4 0,6 0,4 1,0 2,0 2,2 2,4 2,0 2,7 3,0
Crude oil Brent USD/barrel 99 52 44 54 71 66 65 71 56 57
GDP in Eurozone growth in %, const.pr. 1,4 2,1 2,0 2,4 1,8 1,0 1,4 1,9 1,4 1,5

 

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: 9.4.2019

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 2020) and for certain indicators an outlook for another 2 years (i.e. until 2022). 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 3 April 2019, the cut-off date for selected forecast assumptions was 6 March 2019.