Macroeconomic Forecast - April 2020

Department 37 – Economic Policy
Department 37 – Economic Policy

Published

  • Survey
  • Macroeconomic Forecast
Updated 16-4-2020 1:30 PM
  • Full version of the Macroeconomic Forecast

ISSN 2533-5588

Introduction and Summary

This year, the global economy is being severely hit by the spreading pandemic of a new type of coronavirus, the SARS-CoV-2. Measures that are being adopted in response and their side effects will almost inevitably lead to a global economic recession. With uncertainty on the rise and asset prices plummeting, developments in financial markets correspond to the situation.

Governments in the majority of countries hit by the virus are adopting radical measures to slow down explosive growth in the number of infected people. These necessary steps are having and will have a deeply negative effect on macroeconomic developments. In all affected countries, sharp easing of economic policies and adoption of massive monetary, fiscal and other stimuli is a natural reaction, which should help minimize the impact of the pandemic on long-run growth.

Developments in the Czech economy in Q4 2019 were characterized by a further slowdown in the growth of economic output. Real gross domestic product adjusted for seasonal and calendar effects rose 0.5% QoQ, or 2.0% YoY.

On the use side, it was driven by domestic demand, which increased by 4.3%. Despite a sharp increase in households’ savings rate, the biggest contribution came from household consumption, which was up 2.9% thanks to high growth momentum of disposable income. Consumption of the general government sector was 1.8% higher due to increases in both employment and intermediate consumption.

There was another gain in growth momentum of gross fixed capital formation, which rose 4.3%. The growth was driven especially by corporate investments, though investments of the general government sector and households also contributed positively. By the type of expenditure, investments in housing and other buildings and structures recorded the biggest increases.

On the contrary, the contribution of foreign trade was deeply negative. On the export side, low demand from our main trading partners manifested itself and so did a decrease in export performance, especially in the case of export of cars. On the import side, there was another steep rise in import of business services in the area of research and development or consulting.

The Czech economy is profoundly influenced by the coronavirus pandemic and by measures taken to limit the spread of contagion. In this Macroeconomic Forecast, we work with a scenario that Europe will contain the situation in Q2 2020 and economic activity will gradually recover thereafter. The shock to aggregate demand and supply should therefore be only temporary and one-off in nature. Nevertheless, the Czech economy will not avoid a deep recession.

We expect economic output to drop by 5.6% in 2020. Foreign trade and gross fixed capital formation should record the steepest declines. However, household consumption should also be lower. From H2 2020 on, economic activity should be recovering and economic growth could thus reach 3.1% in 2021.

In November 2019, the year-on-year growth of consumer prices exceeded the 3% upper bound of the tolerance band around the Czech National Bank’s inflation target for the first time since October 2012. Pro-inflationary effects of the positive output gap and growing unit labour costs were compounded by administrative measures and rising food prices. Taking into account price developments at the start of this year, we increase our forecast for the average inflation rate in 2020 to 3.2%. In 2021 there should be no significant pro-inflationary factors and inflation should thus ease to 1.6% as a result of a decrease in unit labour costs and persisting negative output gap.

Employment in the Labour Force Survey methodology has been decreasing since Q2 2019. The decrease should deepen in 2020 due to the economic slump and the associated drop in the demand for labour. At the same time, there should be an increase in the unemployment rate to 3.3% in 2020 and further to 3.5% in 2021. Apart from high numbers of job vacancies and employed foreigners the fiscal measures adopted should also help limit the impact of the recession on unemployment.

Within the current account of the balance of payments, the surplus on the balance of goods stopped increasing in Q4, while the surplus on the balance of services continued to decline. The coronavirus pandemic should cause both balances to deteriorate. Within other items on the current account, we expect lower deficit on the balance of primary income, resulting from deteriorated momentum of profits of firms under foreign control. The surplus on the current account could thus reach 0.2% of GDP this year and 0.3% of GDP in 2021.

The budget of the general government sector reached a surplus of 0.3% of GDP in 2019. In structural terms, the medium-term budgetary objective for the Czech Republic amounting to −1.0% of GDP was exactly met. The budget surplus and the economic growth resulted in a year-on-year decrease of total debt by 1.8 pp to 30.8% of GDP. In 2020 the budget performance of the general government will be greatly affected by the coronavirus pandemic. The deep slump in economic activity translates into a decrease or loss of tax revenues, while expenditures to fight the spread of the epidemic and mitigate its economic and social impact will mount. We therefore expect the general government balance to end in a sizeable deficit of 4.1% of GDP. From the perspective of the structural balance the expansionary fiscal policy should lead to a deficit of 2.0% of GDP. The forecast envisages an increase of debt to 35.2% of GDP.

Main Macroeconomic Indicators
  2016 2017 2018 2019 2020 2021 2019 2020 2021
Current forecast Previous forecast
Nominal GDP bill. CZK 4 768 5 047 5 324 5 653 5 530 5 781 5 652 5 913 6 168
  nominal growth in % 3,7 5,9 5,5 6,2 -2,2 4,5 6,2 4,6 4,3
Gross domestic product real growth in % 2,5 4,4 2,8 2,6 -5,6 3,1 2,5 2,0 2,2
   Consumption of households real growth in % 3,6 4,3 3,2 3,0 -1,5 0,8 2,9 2,4 2,2
   Consumption of government real growth in % 2,7 1,3 3,4 2,6 2,6 2,0 3,0 1,9 1,9
   Gross fixed capital formation real growth in % -3,1 3,7 7,6 2,8 -13,6 3,2 1,0 0,9 2,0
   Contribution of net exports pp 1,4 1,1 -0,8 -0,3 -1,2 0,7 0,1 0,2 0,3
   Contrib. of change in inventories pp -0,4 0,1 -0,4 0,2 -0,8 0,8 0,1 0,0 0,0
GDP deflator growth in % 1,3 1,4 2,6 3,5 3,7 1,4 3,6 2,6 2,1
Average inflation rate % 0,7 2,5 2,1 2,8 3,2 1,6 2,8 2,8 2,2
Employment (LFS) growth in % 1,9 1,6 1,4 0,2 -1,2 0,2 0,2 -0,1 0,0
Unemployment rate (LFS) average in % 4,0 2,9 2,2 2,0 3,3 3,5 2,0 2,2 2,4
Wage bill (domestic concept) growth in % 5,7 8,3 9,5 7,1 2,6 0,8 7,2 6,1 5,2
Current account balance % of GDP 1,6 1,7 0,4 -0,4 0,2 0,3 0,3 0,6 0,7
General government balance % of GDP 0,7 1,5 0,9 0,3 -4,1 . 0,3 0,0 .
Assumptions:                    
Exchange rate CZK/EUR   27,0 26,3 25,6 25,7 26,5 26,2 25,7 25,4 25,1
Long-term interest rates % p.a. 0,4 1,0 2,0 1,5 1,5 1,5 1,5 1,4 1,4
Crude oil Brent USD/barrel 44 54 71 64 38 40 64 64 59
GDP in the euro area real growth in % 1,9 2,7 1,9 1,2 -5,7 2,9 1,2 1,0 1,4

 

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: 6.4.2020

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 2021) and for certain indicators an outlook for another 2 years (i.e. until 2023). 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 31 March 2020, the cut-off date for selected forecast assumptions was 26 March 2020.