Czech Republic Economic Forecast

The economy shrank in quarter-on-quarter terms in Q4 2022. A significant contraction in private consumption amid high inflation, downbeat sentiment and tighter financing conditions was the main driver of this. Momentum appears to have remained subdued in early 2023. Business and consumer sentiment were both downbeat in January and February, while the manufacturing PMI remained entrenched in contractionary territory during the same period, weighed down by declining new orders and output. On top of this, inflation accelerated further in January, likely hitting consumer spending. In politics, in mid-February the government decided to weaken the indexation of old-age pensions due to a widening fiscal deficit. This measure will have to be ratified by Parliament, where a major battle is expected.

Inflation rose to 17.5% in January from 15.8% in December—mainly due to faster increases in prices for alcoholic beverages and tobacco and housing and utilities—moving further above the Central Bank’s 1.0–3.0% target range. Inflation should gradually ease this year, although it will remain elevated due to fast nominal wage growth and protracted pass-through effects.