Czech Republic Economic Forecast

A revised estimate revealed that the economy contracted year on year in Q1, swinging from Q4’s timid increase, while it flatlined on a seasonally adjusted quarter-on-quarter basis. The annual decline was due to a sharper contraction in household spending and a downturn in fixed investment amid poor consumer confidence and elevated inflation and interest rates. April’s and May’s downbeat economic sentiment and contractionary PMI readings in the same two months point to further weakness in Q2. Meanwhile, in mid-April, the government unveiled an austerity plan designed to reduce the country’s sizable budget deficit and reform the financially-unsustainable retirement system. The plan includes measures such as hikes in taxes on alcohol, tobacco, and high-income earners; cuts to social welfare programs and public sector workers’ salaries; and an increase in the retirement age.

Inflation fell to 12.7% in April from 15.0% in March due to slower increases in prices for food and non-alcoholic beverages, restaurants and hotels and housing and utilities. Therefore, inflation moved closer to the Central Bank’s 1.0–3.0% target range. Price pressures should continue easing this year, although protracted pass-through effects will keep them above target.