Macroeconomic Forecast - September 2020

Dept 37 - Economic Policy
Dept 37 - Economic Policy

Published

  • Survey
  • Macroeconomic Forecast
  • Statistics

ISSN 2533-5588

Introduction and Summary

The coronavirus pandemic, the anti-epidemic measures taken, and their knock-on effects have caused a deep and synchronous downturn in the global economy. Its depth is unprecedented in the post-World War II period. Economic policy in all the countries affected has responded with drastic easing and the adoption of massive fiscal and monetary stimuli, which should help minimise the pandemic’s impact on long-term growth.

However, in most countries the upswing in economic activity we are now witnessing is unlikely to be strong enough in 2021 to fully offset the economic slump they suffered in the first half of this year. The forecast for next year is subject to huge uncertainties. The greatest ones include how the pandemic will continue to unfold, carrying with it the risk of further restrictions on activity, how flexible the labour market is when it comes to absorbing the fallout of inevitable cyclical and structural changes associated with the slump or, conversely, expansion of certain sectors, and how global production chains will be transformed and what effect this will have on labour productivity.

In Q2 2020, the Czech economy suffered the deepest decline in economic performance in the history of the independent Czech Republic. Seasonally and calendar adjusted real gross domestic product tumbled by 8.7% QoQ and 11.0% YoY. Compared internationally, this is actually a relatively good result, as GDP in the euro area fell by 14.7% YoY.

On the use side, the most significant factor behind the decline was the external trade contribution of −5.1 pp. Exports of goods and services, down by 23.1%, were exposed to interruptions in supply chains, weak demand from key trading partners, and a slump in export performance. Imports, which declined by 18.4%, were constrained by domestic demand and demand among exporters for inputs.

Within domestic use, the steepest fall was recorded in household consumption, which contracted by 7.3%. The main culprits here were the downturn in real wages, perhaps compounded by certain other components of disposable income, and the impossibility of spending on certain types of goods and, especially, services while the restrictive measures were in place.

General government consumption was the only component of domestic use to grow, rising by 2.1%.

The decline in fixed capital investments was a surprisingly low 4.6%. While investments in non-residential buildings and structures climbed by 6.7%, investments in housing more or less stagnated. Investments in machinery, including motor vehicles, suffered a deep slump.

In the macroeconomic forecast, we assume a scenario in which no further significantly restrictive measures will be taken in response to the epidemic. Economic activity should gradually recover, meaning that the shock to aggregate demand and supply ought to be only a temporary and one-off affair.

Overall, we are expecting economic performance to fall by 6.6% in 2020. There should be a steep decline in all areas of use other than general government consumption. With economic activity projected to recover from mid-2020 onwards, economic growth in 2021 could reach 3.9%.

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. With the exception of May 2020, inflation did not drop below this level even in the face of slumping consumer demand. This situation can probably be attributed to shortfalls on the supply side of the economy, combined with rapidly rising food prices. We leave our forecast for the average inflation rate in 2020 unchanged at 3.2%. No significant pro-inflationary factors are expected to emerge in 2021, and, in the wake of falling unit labour costs and the ongoing negative output gap, inflation should ease to 1.9%.

According to the Labour Force Survey, employment has been decreasing since Q2 2019. This downturn should intensify in both 2020 and 2021 on account of the delayed effect of the economic slump and the associated drop in labour demand. Likewise, the unemployment rate is projected to rise on average to 2.6% in 2020 and then 3.4% in 2021. Government measures are acting in tandem with the high number of vacancies and employed foreign nationals to keep the recession from having a greater impact on unemployment.

In 2020, the general government balance has largely been influenced by the coronavirus pandemic because the slump in economic activity has been accompanied by declining or stalled tax revenues in a situation where spending has been increased to combat the spread of the epidemic and to mitigate its economic and social impacts. Consequently, we expect the general government sector to report a deficit equal to 6.4% of GDP. From the perspective of the structural balance, expansionary fiscal policy should result in a deficit of 2.7% of GDP. The forecast projects that debt will rise to 39.4% of GDP.

 

Main Macroeconomic Indicators
  2015 2016 2017 2018 2019 2020 2021 2020 2021
Current forecast Previous forecast
Nominal GDP bill. CZK 4 625 4 797 5 111 5 409 5 749 5 561 5 860 5 530 5 781
  nominal growth in % 6,4 3,7 6,5 5,8 6,3 -3,3 5,4 -2,2 4,5
Gross domestic product real growth in % 5,4 2,5 5,2 3,2 2,3 -6,6 3,9 -5,6 3,1
   Consumption of households real growth in % 3,9 3,8 4,0 3,5 3,1 -5,0 2,2 -1,5 0,8
   Consumption of government real growth in % 1,8 2,5 1,8 3,8 2,3 3,8 2,9 2,6 2,0
   Gross fixed capital formation real growth in % 9,7 -3,0 4,9 10,0 2,2 -7,5 3,0 -13,6 3,2
   Contribution of net exports pp -0,2 1,4 1,2 -1,2 0,0 -1,7 0,9 -1,2 0,7
   Contrib. of change in inventories pp 0,9 -0,3 0,5 -0,5 -0,2 -1,3 0,6 -0,8 0,8
GDP deflator growth in % 1,0 1,1 1,3 2,6 3,9 3,6 1,4 3,7 1,4
Average inflation rate % 0,3 0,7 2,5 2,1 2,8 3,2 1,9 3,2 1,6
Employment (LFS) growth in % 1,4 1,9 1,6 1,4 0,2 -1,2 -0,7 -1,2 0,2
Unemployment rate (LFS) average in % 5,1 4,0 2,9 2,2 2,0 2,6 3,4 3,3 3,5
Wage bill (domestic concept) growth in % 5,0 5,7 9,2 9,6 6,6 -1,9 0,8 2,6 0,8
Current account balance % of GDP 0,4 1,8 1,5 0,4 -0,3 0,3 0,4 0,2 0,3
General government balance % of GDP -0,6 0,7 1,5 0,9 0,3 -6,4 . -4,1 .
Assumptions:                    
Exchange rate CZK/EUR   27,3 27,0 26,3 25,6 25,7 26,3 25,8 26,5 26,2
Long-term interest rates % p.a. 0,6 0,4 1,0 2,0 1,5 1,1 0,9 1,5 1,5
Crude oil Brent USD/barrel 52 44 54 71 64 42 48 38 40
GDP in the euro area real growth in % 1,9 1,8 2,8 1,8 1,3 -9,0 5,4 -5,7 2,9

 

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: 22.09.2020

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 9 September 2020, the cut-off date for selected forecast assumptions was 31 August 2020.