Domestic, foreign demand to underpin Czech economic growth this year

The Czech economic growth is expected to slowdown in the whole of 2016 from the growth recorded in the previous year. According to a Erste Group Research, the Czech Republic’s GDP growth is expected to decelerate to 2.6 percent in 2016 from 4.6 percent in 2015. The slowdown is mostly expected to be impacted by previous year’s extraordinary volume of public investment.

The Brexit vote is likely to adversely impact the economy growth by 0.3 percentage points in 2017 through lower growth of net exports and investment, added Erste Group. Moreover, the exit from the FX cap would slightly lower the GDP growth. But these impacts would be countered by slightly higher domestic demand.

Economic development in Germany is mainly driving Czech Republic’s foreign demand, which, besides the direct exports channel, also impacts the nation’s labor market that in turn spills over into strong private consumption, noted Erste. But household consumption posted surprisingly low growth in the second quarter of 2016, rising 2.2 percent year-on-year.

“Although we see this as being at odds with other indicators, it will negatively affect overall 2016 growth”, stated Erste.

Moreover, there has been slower than anticipated public investment growth in 2016 and is likely to accelerate next year. Meanwhile, CPI inflation is expected to remain low in 2016 as the subdued economic activity in the euro area through import prices and low fuel and food prices are negative impacting inflation.

But, inflation has been rebounding since July because of rises in food prices. Furthermore, the negative contribution of fuel prices from the annual print has been waning in the second half of 2016. Rising demand pressures and strong wage growth would be contributing to the gradual return of inflation towards the target rate in the next year, stated Erste.