Czech Republic Economic Forecast

The economy contracted year on year in Q2, weighed down by another decline in consumer spending and shrinking inventories. Data for Q3 hints at protracted economic weakness. In July-August, the manufacturing PMI was stuck in contractionary terrain, while businesses and consumers remained deeply pessimistic. More positively, inflation continued to decline in July, although it came in at almost 9.0%. In politics, in late August, the ruling center-right coalition reached an agreement on changes to its austerity package, as it seeks to reduce the budget deficit. At around the same time, Fitch Ratings affirmed the country’s AA- credit rating while keeping a negative outlook due to its weak public finances. Also in late August, the European Commission approved a EUR 800 million scheme to support businesses in the face of increased energy prices.

Inflation fell to 8.8% in July from 9.7% in June—the lowest reading since December 2021. The drop was due to a broad-based moderation in price increases. Inflation should continue to decline for the remainder of the year, although protracted pass-through effects will keep it above the Central Bank’s 1.0–3.0% target range. Oil and gas prices are key factors to watch.