Macroeconomic Forecast - January 2022

Department 37 – Economic Policy
Department 37 – Economic Policy

Published

  • Macroeconomic Forecast
  • Statistics
Updated 25-1-2022 2:00 PM
  • The English version of the Macroeconomic Forecast - January 2022 has been published

ISSN 2533-5588

Introduction and Summary

Economic output in most advanced economies has already exceeded or is approaching the end-2019 level. However, the recovery is fragile and highly uneven both across countries and sectors. Close contact services, such as travel, tourism and various leisure activities, remain the hardest hit. In contrast, global demand for consumer goods is high, thanks also to the largely very loose fiscal and monetary policies so far. However, the supply side is constrained by persisting problems in supply chains and shortages of some specific production inputs. As a result, inflation has accelerated across all price categories, including consumer prices.

The very open Czech economy with a high share of car production in value added is highly vulnerable in this respect. Problems on the supply side of the economy are reinforcing adverse inflationary developments, slowing economic growth and contributing to a decrease in the current account surplus.

In Q3 2021, real gross domestic product of the Czech Republic, adjusted for seasonal and calendar effects, increased by 1.6% QoQ. The year-on-year growth (unadjusted) reached 3.0%.

Household consumption increased by 5.9%, driven by the growth in real disposable income and relaxed anti-epidemic measures, which, together with improved consumer confidence, led to a decline in the savings rate. General government consumption grew by 3.0% on the back of higher health spending and employment growth.

Gross fixed capital formation was only 0.4% higher. Increases in investment in dwellings, transport equipment and intellectual property products were accompanied by declines in other categories. From a sectoral perspective, the growth was supported by investment spending by households and general government.

The contribution of the change in inventories and valuables to economic growth was 6.8 pp, the highest since the beginning of the time series in 1997. Firms replenished inventories, apparently to avoid shortfalls in component supplies and losses resulting from high inflation, and stocks of work in progress also increased.

However, the contribution of the foreign trade balance was deeply negative (−7.2 pp), not just because of shortfalls in export production but also due to the high import rate resulting from the strong accumulation of inventories.

We estimate that the Czech Republic’s economic output rose by 2.9% in 2021 as a whole, with all components of domestic demand contributing positively, most notably the change in inventories and household consumption. By contrast, the foreign trade balance slowed down economic growth strongly.

For the year 2022, we work with a scenario in which the worsening epidemic situation can be managed without the need to adopt macroeconomically significant anti-epidemic restrictions. At the same time, we expect the adverse effects of rising input prices and disruptions in production chains to persist in the first half of this year.

Economic growth of 3.1% should then be driven by investment spending by the private sector and public institutions. Household consumption should continue to be an important growth driver. However, it will be dampened by a sharp increase in the cost of living, especially energy prices. The external trade balance should also make a positive contribution.

High inflation is becoming a macroeconomic and social problem. The average rate of inflation was 3.8% in 2021 and is expected to reach 8.5% this year. Annual inflation should be close to 10% in Q1 2022 and remain elevated for the rest of the year. Increases in electricity and gas prices should contribute significantly to inflation this year. The price of oil and unit labour costs will also be pro-inflationary, but the strength of these factors should be lower than in 2021. Supply frictions are likely to persist in the first half of the year. On the contrary, the appreciation of the Czech koruna against the euro, triggered by the increase in monetary policy rates, should be anti-inflationary.

After a short pause, the imbalances that characterised the labour market before the outbreak of the epidemic are reappearing. Labour shortages persist in virtually all sectors of the economy. Unemployment is decreasing thanks to the continued economic growth. The seasonally adjusted unemployment rate fell to 2.3% in November 2021, the lowest level since April 2020. We estimate that the unemployment rate averaged 2.8% in 2021 and will fall further to 2.3% in 2022.

Supply chain disruptions and forced production shutdowns in industry led to a significant decline in the surplus on the current account of the balance of payments. The deterioration in the positive balance was also influenced by strong momentum of goods imports. Component shortages, together with rising input and energy prices, are expected to weigh on the trade balance also this year. We therefore estimate that the current account reached a deficit of 1.0% of GDP in 2021, which could widen to 1.3% of GDP in 2022.

In 2021, the public finances were heavily burdened by the situation caused by the coronavirus epidemic, its economic consequences and the measures implemented in the health sector, as well as the impact of stimulus fiscal policy. We estimate that in 2021 expansionary fiscal policy led to a deficit of 6.1% of GDP and a rise in debt to 42.0% of GDP.

 

Main Macroeconomic Indicators
  2016 2017 2018 2019 2020 2021 2022 2021 2022
Current forecast Previous forecast
Nominal GDP bill. CZK 4 797 5 111 5 410 5 790 5 694 6 103 6 617 6 038 6 498
  nominal growth in % 3,7 6,5 5,8 7,0 -1,7 7,2 8,4 6,0 7,6
Gross domestic product real growth in % 2,5 5,2 3,2 3,0 -5,8 2,9 3,1 2,5 4,1
Consumption of households real growth in % 3,8 4,0 3,5 2,7 -6,8 4,8 2,3 3,7 4,7
Consumption of government real growth in % 2,5 1,8 3,8 2,5 3,4 1,9 0,4 2,3 0,4
Gross fixed capital formation real growth in % -3,0 4,9 10,0 5,9 -7,5 0,8 5,4 4,6 5,4
Contribution of net exports pp 1,4 1,2 -1,2 0,0 -0,5 -3,0 0,6 -2,5 0,4
Contrib. of change in inventories pp -0,3 0,5 -0,5 -0,3 -0,8 3,2 0,0 1,6 0,0
GDP deflator growth in % 1,1 1,3 2,6 3,9 4,4 4,1 5,2 3,4 3,4
Average inflation rate % 0,7 2,5 2,1 2,8 3,2 3,8 8,5 3,5 6,1
Employment (LFS) growth in % 1,9 1,6 1,4 0,2 -1,3 -0,4 1,1 -0,5 0,8
Unemployment rate (LFS) average in % 4,0 2,9 2,2 2,0 2,6 2,8 2,3 3,0 2,7
Wage bill (domestic concept) growth in % 5,7 9,2 9,6 7,8 0,2 5,7 5,4 5,3 5,1
Current account balance % of GDP 1,8 1,5 0,4 0,3 3,6 -1,0 -1,3 -0,1 -0,3
General government balance % of GDP 0,7 1,5 0,9 0,3 -5,6 -6,1 . -7,2 -4,4
Assumptions:                    
Exchange rate CZK/EUR   27,0 26,3 25,6 25,7 26,4 25,6 24,4 25,6 25,0
Long-term interest rates % p.a. 0,4 1,0 2,0 1,5 1,1 1,9 3,3 1,9 2,7
Crude oil Brent USD/barrel 44 54 71 64 42 71 76 70 72
GDP in the euro area real growth in % 1,8 2,8 1,8 1,6 -6,5 5,1 3,9 5,0 3,9

Tables and Graphs

Preparation of the Macroeconomic Forecasts

Evaluation of Forecasting History at the Ministry of Finance

Information

  • The Macroeconomic Forecast is prepared by the Economic Policy Department of the Czech Ministry of Finance. It contains a forecast for the year 2022 and for certain indicators an outlook for 2 following years (i.e. until 2024). It is published on a quarterly basis (in January, April, August and November).
  • Any comments or suggestions that would help us improve the quality of our publication and closer satisfy the needs of its users are welcome. Please send any comments to the following email address: macroeconomic.forecast(at)mfcr.cz
  • Cut-off Date for Data Sources:
    The forecast is based on the data known as of 13 January 2022; the cut-off date for selected forecast assumptions was 6 January 2022.