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Czech Republic Economic Outlook - March 2017

Core Content Summary

This report provides an economic outlook for the Czech Republic for the years 2017 and 2018, focusing on growth, inflation, public finances, and foreign exchange (FX) dynamics. The analysis is based on data from various sources, including Macrobond, CNB, CZSO, and BGZ BNP Paribas.

Main Economic Forecasts

• GDP Growth:

  • Revised up to 2.2% for 2017 from 1.5% previously, due to stronger eurozone growth.
  • Expected to grow at 1.8% in 2018.
  • Growth is expected to be in line with the country's long-term potential growth rate of around 2%.

• Private Consumption:

  • Remains the primary growth driver in 2017-2018, supported by a robust labour market and strong real earnings growth.
  • Expected to contribute 2.5% in 2017 and 2.9% in 2018.

• Fixed Investment:

  • Expected to increase modestly in 2017-2018, though labor shortages may constrain capital spending.
  • Likely to contribute 2.9% in 2017 and 3.4% in 2018.

• Exports and Imports:

  • Exports are expected to grow by 7.3% in 2017 and 7.9% in 2018.
  • Imports are projected to rise by 6.8% in 2017 and 10.1% in 2018.
  • Net trade is expected to weaken due to the economy operating at full capacity, reducing the contribution of net exports to GDP growth.

• Current Account Surplus:

  • Expected to fall from 1.8% of GDP in 2016 to 1.2% in 2017 and 0.7% in 2018, due to stronger domestic demand and higher commodity prices.

Inflation Outlook

• CPI Inflation:
  • Expected to average 2.1% in 2017 and 1.3% in 2018.
  • Headline inflation is likely to be temporarily boosted by supply-side factors such as higher fuel and food prices.
  • Core inflation is expected to remain moderate, with CPI inflation expected to fall below the CNB's 2% target in late 2017.

FX Cap and Currency Outlook

• EURCZK Cap:

  • The CNB has been reiterating its intention to lift the EURCZK floor in mid-2017 if inflation remains above the target.
  • A likely date for lifting the cap is 29 June 2017.

• CZK Appreciation:

  • A "fair" level for the EURCZK is estimated at 25.00, based on productivity and external balances.
  • Market positioning may prevent a rapid appreciation of the CZK after the cap is removed.
  • BNP Paribas forecasts EURCZK at 25.00 in early 2018 and 26.00 by the end of 2018.

Public Finances

• Government Budget:
  • Recorded a surplus in 2016 due to fiscal consolidation.
  • Expected to remain broadly balanced in 2017.
  • Increased government spending is anticipated in 2018 following parliamentary elections in autumn 2017.
  • Public debt to GDP ratio is projected to steadily decrease in the years to come, despite a slightly worse fiscal position in 2018, due to solid nominal GDP growth.

Interest Rates

• Policy Rate:
  • Expected to remain unchanged in the near term.
  • Early interest rate hikes are unlikely, as substantial CZK appreciation could increase disinflationary risks.
  • ECB's QE tapering and deposit/refill rate hikes are not expected to immediately pressure the CNB to raise rates.

Key Risks and Considerations

• Labour Shortages:

  • May weigh on capital spending in the coming quarters.
  • A high positive output gap suggests economic expansion may slow in the future.

• Inflation Dynamics:

  • Stronger-than-expected wage growth is a key risk to the growth forecast.
  • CPI inflation is expected to fall below the CNB's target in late 2017 as fuel and food prices normalize.

• FX Volatility:

  • Increased volatility of the CZK is expected after the cap is removed.
  • Market positioning may limit rapid appreciation, but long-term fundamentals suggest a stronger koruna.

Legal Notice

• The report is for investment research purposes under MiFID.
• It is directed at Professional Clients and Eligible Counterparties.
• It does not constitute an offer to buy or sell any securities.
• Information is based on public sources and not independently verified.
• BNP Paribas does not provide investment, financial, legal, or tax advice.
• The document may be subject to different legal regulations in various countries, and is only suitable for Qualified Investors in Switzerland, and specific regulations apply in other jurisdictions like the UK, France, Germany, Belgium, Ireland, Italy, Netherlands, Portugal, Spain, Canada, Brazil, Turkey, Israel, Bahrain, and South Africa.