The US Fed and the European Central Bank seem to have put a stop to interest rate hikes

What was 2023 like in economic terms? From the Czech point of view, in a word - weak. In terms of GDP, the Czech economy is declining. Specifically, in Q3 GDP fell by 0.5 % quarter-on-quarter and by 0.7 % year-on-year. For this year as a whole, we estimate that the Czech economy will lose 0.4 %. The description of the Czech economy as the "sick man of Europe" is appropriate. The Czech economy is being dragged down mainly by the fact that, despite a visible decline in inflation, households have not kicked spending into high gear. It is true that the rate of inflation has already descended to single-digit levels. But because of the strong inflation earlier this year, price growth will average just under 11 % for the whole of 2023. Household saving is best demonstrated by the fact that retail sales have fallen in real terms for a year and a half in a row. Moreover, discount-seeking has become a national sport.

It is doubly unpleasant for the Czech economy at this time that the wheels of industry remain rusty. On average for the whole year, industrial production will not grow, but will fall by 0.5 %. Although energy prices have already fallen from record highs, they are still unable to return to pre-2020 levels. Logically, energy-intensive sectors are suffering the most. The industrial statistics could have looked much worse if the key sector of Czech industry - car manufacturers - had not been helped to perform better by the low comparative base of last year. At that time, the completion of cars was hampered by a shortage of parts. Foreign trade was also unable to drag the Czech economy to better results. In January-October 2023, the trade surplus reached CZK 88.9 billion. This is, of course, a radically different result from last year, when we saw a deficit of CZK 176 billion in the same period. Because of the current weak condition of our largest trading partner, Germany, we could not have asked for a better result from foreign trade. Germany, where around a third of Czech exports have been going for a long time, is forecast by the government there to fall by 0.4 % this year for the full year. So Germany has enough problems of its own and will not pull us out of the mess.

We must also look at the Czech economy through the lens of the labour market. The unemployment rate stagnated during November at 3.5 % in October. In recent years, regardless of whether the Czech economy is doing well or not, unemployment has remained extremely low. This may look favorable from the perspective of employees. However, this situation means that the workforce is virtually not being transferred from unproductive firms and sectors to productive ones. Moreover, it discourages foreign companies from investing in the Czech Republic because of fears that they will be looking for new employees for a long time. Both are then a drag on economic growth. At the same time, wages continue to fall in real terms - by 0.8 % in the third quarter in particular. This means that Czech households are still getting poorer in real terms due to high inflation, for the eighth quarter in a row.

All these statistics are monitored by the Czech National Bank (CNB). Although the rate of inflation slowed down during the year from 17.5 % in January to 7.3 % in November, the CNB made do with the same interest rate setting throughout the year. The CNB's main rate, the 2-week repo rate, has remained at 7 % since the summer of 2022. The koruna is currently trading at CZK 24.45 to the euro, while during the spring it was paying only CZK 23.20 for 1 euro. Since then, the koruna has visibly weakened. Meanwhile, the koruna's interest rate advantage over the euro has shrunk. How is this possible? Although the CNB did not even want to hear about a change in interest rates, the European Central Bank has gradually raised its rates up to 4.50 %.

And how was 2023 for stock investors? Quite a good one in the end. The Prague Stock Exchange's PX index has risen by 17 % since the beginning of the year. This left behind the US DJIA index with 10% growth and the German DAX index with 14% growth. The Slovak stock index SAX ended this year in negative 6 %. The stock indices improved their scores significantly only in the last quarter of this year. What helped them to grow? First of all, the fact that the US Fed and the European Central Bank seem to have already put a stop to interest rate hikes. Investors then quickly started betting that interest rates around the world could go down as early as next spring. Well, in the eyes of investors, there is no better reason for stock markets to rise than betting on cheaper credit.

Markéta Šichtařová
Next Finance s.r.o.
nextfinance.cz