Czech Republic Economic Forecast

The economy surprised on the upside and expanded a timid 0.2% in quarter-on-quarter terms in Q1. The accompanying press release revealed that external demand was behind the expansion. On the other hand, gross fixed capital formation and total consumption both contracted, buffeted by elevated inflation and interest rates. Available data for the second quarter points to activity strengthening to some extent but remaining underwhelming. Both business and consumer sentiment gained some ground in April, although they remained in pessimistic terrain. On the other hand, the manufacturing PMI fell deeper into contractionary territory amid muted demand. Meanwhile, the pension system recorded its biggest ever deficit in Q1 2023, which spells trouble for the structural sustainability of pension spending.

Inflation fell to 15.0% in March from 16.7% in February—mainly due to slower increases in prices for food and non-alcoholic beverages and housing and utilities, as well as falling transport prices. It therefore moved closer to the Central Bank’s 1.0–3.0% target range. Inflation should continue to gradually ease ahead, but protracted pass-through effects will keep it well above target.