Macroeconomic Forecast - November 2019

Dept 37 - Economic Policy
Dept 37 - Economic Policy

Published

  • Macroeconomic Forecast
  • Survey

ISSN 2533-5588

Introduction and Summary

Global economic expansion continues to flag, with the growth of the world economy expected to be at its weakest since the Great Recession in 2009. This has been caused primarily by increased protectionism and escalating tension in international trade relations, spawning uncertainty among businesses and consumers alike as to what the economic future holds. This significantly increases the downside risks.

Nor have the European Union's economies avoided the slowdown. Relatively strong domestic demand and the labour market situation remain positive factors, export-oriented activities less so. In Q2 2019, developments in individual member states varied - the economies of the UK, Germany and Sweden declined slightly quarter on quarter, whereas the Italian economy has long been stagnant, and the economies of the Visegrad Group countries are in good shape.

As for the United Kingdom's withdrawal from the European Union, the withdrawal date has again been postponed, this time to 31 January 2020. If, however, the British parliament approved the amended withdrawal agreement before this date, the United Kingdom could leave the EU sooner. Therefore, uncertainty that has unfavourable economic consequences prevails also in this area, magnified by the fact that early parliamentary elections will be held in the United Kingdom in December.

The Czech economy progressed along rather more positive lines than expected in Q2 2019. Real gross domestic product, adjusted for seasonal and calendar effects, climbed by 0.7% QoQ and 2.8% YoY.

Household consumption went up by 2.6% on the back of the still high growth momentum of wages, salaries and social benefits. Consumption of the general government sector increased by 3.4%, underpinned by rising employment and intermediate consumption.

Fixed capital investment growth slowed to 0.2%, mainly because of a downturn in investment by private firms. The momentum of general government investment remained high at roughly 10%. In the breakdown by type of expenditure, investment in housing construction and intellectual property products rose, while investment in vehicles and machinery and equipment declined.

On the other hand, the highly positive contribution of foreign trade came as a welcome surprise. On the export side there was a positive base effect in exports of cars, and the growth in imports was inhibited by slowing domestic demand, primarily in relation to highly import-intensive investment.

Economic developments in the first half of 2019 confirmed the disconnection between "hard" data and business cycle indicators. Statistical data covering areas such as construction, external trade and retail sales continue to post decent results. By contrast, the composite confidence indicator, clearly heavily influenced by mounting risks, has been hinting since October 2018 that economic activity will slow down significantly. Though this has yet to happen, the increasing risks urge caution. The economy could grow by 2.5% in 2019, and then - reflecting the momentum of domestic demand - by 2.0% in 2020.

Economic growth should continue to be driven by consumption of households that should reflect the ongoing strength of wage momentum in combination with extremely low unemployment rate and a major hike in pensions. Fixed capital investment and general government sector consumption should also make a moderate contribution to growth. Foreign trade is also on track to make a somewhat positive contribution.

Since the beginning of 2017, the year-on-year growth in consumer prices has mostly hovered in the upper half of the tolerance band of the Czech National Bank's 2% inflation target. Bar the odd exception, it should remain there also in 2019 and 2020, when pro-inflationary effects of growing unit labour costs and the positive output gap are expected to be compounded by administrative measures. We revise our forecast for the average inflation rate up to 2.8% in 2019 and 2.6% in 2020.

In Q2 2019, employment went up by just 0.1%. The scarcity of labour is the primary barrier to further extensive growth in production. We feel that there is no further room for another drop in unemployment. Growth in labour demand should weaken as the economy slows down. By contrast, labour supply - driven by demographic and structural factors - should increase faster than demand. Consequently, the unemployment rate could reach 2.0% in 2019 and 2.2% in the following year.

Within the current account of the balance of payments one can expect the surplus on the balance of goods to increase in 2019 due to a one-time slump in motor vehicles exports in mid-2018, which sharply lowered the base for comparison. In 2020, the forecast investment momentum should pave the way for a slowdown in import growth. Other components of the current account should more or less stagnate or improve marginally. As a result, the surplus on the current account should amount to 0.9% of GDP in 2019 and 1.4% of GDP in 2020.

The growth of the Czech economy is also reflected in the general government balance, which should end up with a surplus equivalent to 0.3% of GDP in 2019. In 2020, we expect a surplus of 0.1% of GDP, resulting from the slowing pace of revenue and increased spending, especially in the social area. The relative level of general government debt is forecasted to decline further to 30.6% of GDP by the end of 2020.

 

Main Macroeconomic Indicators
  2014 2015 2016 2017 2018 2019 2020 2019 2020
Current forecast Previous forecast
Nominal GDP bill. CZK 4 314 4 596 4 768 5 047 5 329 5 645 5 894 5 627 5 880
  nominal growth in % 5.3 6.5 3.7 5.9 5.6 5.9 4.4 5.6 4.5
Gross domestic product real growth in % 2.7 5.3 2.5 4.4 3.0 2.5 2.0 2.5 2.3
    Consumption of households real growth in % 1.8 3.7 3.6 4.3 3.4 2.7 2.4 2.8 2.6
    Consumption of government real growth in % 1.1 1.9 2.7 1.3 3.9 3.0 1.8 2.4 1.9
    Gross fixed capital formation real growth in % 3.9 10.2 -3.1 3.7 7.2 0.9 0.7 2.5 2.4
    Contribution of net exports pp -0.5 -0.2 1.4 1.1 -0.8 0.4 0.3 0.4 0.2
    Contrib. of change in inventories pp 1.1 0.8 -0.4 0.1 -0.4 0.0 0.0 -0.3 0.0
GDP deflator growth in % 2.5 1.2 1.3 1.4 2.5 3.3 2.4 3.0 2.1
Average inflation rate % 0.4 0.3 0.7 2.5 2.1 2.8 2.6 2.5 2.2
Employment (LFS) growth in % 0.8 1.4 1.9 1.6 1.4 0.3 0.1 0.7 0.3
Unemployment rate (LFS) average in % 6.1 5.1 4.0 2.9 2.2 2.0 2.2 2.2 2.3
Wage bill (domestic concept) growth in % 3.6 4.8 5.7 8.3 9.5 7.4 5.9 7.4 5.9
Current account balance % of GDP 0.2 0.2 1.6 1.7 0.3 0.9 1.4 0.6 0.8
General government balance % of GDP -2.1 -0.6 0.7 1.6 1.1 0.3 0.1 0.3 .
Assumptions:                    
Exchange rate CZK/EUR   27.5 27.3 27.0 26.3 25.6 25.7 25.5 25.6 25.2
Long-term interest rates % p.a. 1.6 0.6 0.4 1.0 2.0 1.5 1.2 2.0 2.4
Crude oil Brent USD/barrel 99 52 44 54 71 64 59 64 60
GDP in the euro area real growth in % 1.4 2.0 1.9 2.7 1.9 1.0 0.7 . .

 

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: 7.11.2019

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 10 October 2019, the cut-off date for selected forecast assumptions was 2 October 2019.