At the end of January, Czech statisticians presented a preliminary estimate of how the Czech economy fared at the end of last year. At that time, the statistics spoke of GDP adding 0.2 % quarter-on-quarter in Q4 2023. However, it was still true that the economy was contracting year-on-year, specifically in the fourth quarter of last year it was expected to lose 0.2 %.
Today, statisticians confirmed these figures. This means that, also according to the refined estimate, GDP grew by 0.2 % q-o-q and declined by 0.2 % y-o-y in Q4 2023. What does it say? That we have avoided falling into recession - after all, the Czech economy did not fall quarter-on-quarter for two consecutive quarters last year. On the other hand, it's a proper bummer that the economy fell year-on-year in all four quarters of 2023.
On the demand side
The Czech economy needs households to be more adventurous in their spending. In fact, household final consumption expenditure grew by only 0.5 % quarter-on-quarter in the last quarter of last year. At least the good news is that purchases not only of durables but also of intermediate goods and services have increased. This offers some hope for a turnaround in household consumption. However, year-on-year, household final consumption expenditure fell by 0.5 %.
On the other hand, the state apparatus is not worried about starting to cut spending. Government final consumption expenditure rose by 1.9 % year-on-year.
Gross fixed capital formation rose by 1.1 % quarter-on-quarter and by 4.7 % year-on-year. Investment in transport equipment and machinery and equipment grew year-on-year. There was a decline in investment in dwellings, other buildings and structures. This was already indicated by the individual sub-statistics from the construction sector. Indeed, 2023 has become a year of postponement of new construction. The GDP result was hurt by a fall in inventories. The change in inventories amounted to minus CZK 54.8 billion. This was CZK 103.5 billion less than in the same quarter of the previous year. However, this is not such a tragedy. In fact, it basically says that there has been a release of stocks that have ballooned with goods during the pandemic years.
The GDP results attempted to substantially improve foreign trade. The balance of foreign trade in goods and services reached CZK 128.0 billion at current prices and was CZK 106.4 billion higher than in the same period of the previous year. Here, it was evident that the automakers were able to finalise their work-in-progress production and finally send new cars to the market in large numbers. This was certainly not the norm after 2020 due to component shortages.
Gross value added
We can also look at the performance of the Czech economy through the lens of the value created by individual sectors. We therefore have gross value added (GVA). This increased by 0.6 % quarter-on-quarter and 0.3 % year-on-year in Q4 2023. Manufacturing (1.7 % y-o-y growth) and information and communication activities (+4.0 %) were the largest contributors to annual GDP growth. On the other hand, the trade, transport, accommodation and food services (-1.8 %) had a negative impact. In addition, the construction sector also declined by 0.4 % year-on-year. Here, high interest rates and related expensive mortgages remained a drag.
Through the lens of the whole year 2023
If we recapitulate the development for the whole of last year, GDP fell by 0.4 % in 2023. How did this figure come about? Full-year developments were negatively affected by household final consumption expenditure -1.2 percentage points (pp) and inventory change -3.1 pp. Positive effects were seen in government final consumption expenditure (+0.6 pp), gross fixed capital formation expenditure (+1.1 pp) and external demand (+2.2 pp).
And what do these numbers add up to? That the Czech economy has not returned to its pre-pandemic level for the fourth year in a row. Other countries in the European Union have already made it.
What's next?
The economy will be partly boosted this year by the end of belt-tightening by Czech households. Their spending will slowly increase. This should be helped, first and foremost, by the fact that the rate of consumer inflation should slow down visibly below 3 % on average throughout this year. This is much more acceptable than in 2023, when it averaged in double digits. Moreover, the decline in the inflation rate will be reflected in real wage growth. Further helping to boost spending will be the high level of accumulated household savings combined with a very low comparative base.
On the other hand, many companies continue to see their orders fall and are affected by high energy prices. Moreover, we cannot rely on what has helped us several times in the past. This time, Germany will not pull us out of the worst. The German economy will grow by only 0.2% this year, according to the updated estimate of the German Government - that is, it will not grow at all.
Adding it all up, the Czech economy will return to growth in 2024, but it will be only weak. According to our model, on average we will grow by only 0.7 % this year.
Expected market reaction
Statisticians confirmed today the GDP result they presented in January. This contributed to the koruna stagnating just above CZK 25.30/EUR today. Our scenario for the coming days remains unchanged - the slowing inflation rate and the weakness of the Czech economy call for further interest rate cuts. In our view, rates will go down by 50 basis points at the next meeting of the Czech National Bank's Board. If the Czech National Bank were to cut interest rates at an even faster pace, this could put undue pressure on the depreciation of the koruna. And that is something the Bank Board will not want to risk. We are therefore continuing to bet on the koruna stagnating near today's (weak in recent weeks) levels.
Markéta Šichtařová
company director
Next Finance s.r.o.
nextfinance.cz/gnews.cz-GeH_07
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