The Ministry of Finance of the Czech Republic published the final report of the International Monetary Fund (IMF) mission to the Czech Republic, the Concluding Statement. In it, the IMF praised the government's consolidation efforts. Both institutions see the need for continued fiscal reforms and responsible reduction of the budget deficit by 0.5 % per year.
The final statement describes the preliminary findings of IMF staff at the end of an official staff visit (or "mission"), in most cases to a member country. Missions take place in the context of regular (usually annual) consultations under Article IV of the Articles of Agreement of the IMF, in the context of a request for the use of IMF resources (an IMF loan), in the context of discussions of staff-monitored programs, or in the context of other staff monitoring of economic developments.
The authorities have agreed to publish this statement. The views expressed in this statement are those of the IMF staff and do not necessarily reflect the views of the IMF Executive Board. Based on the preliminary findings of this mission, the IMF staff will prepare a report to be submitted to the IMF Executive Board for consideration and decision, subject to management approval.
The Czech economy is slowly recovering after an unprecedented combination of shocks. This development is taking place at a time when the country is transitioning from strongly manufacturing-led and export-oriented growth to a more mature and diversified economy. A prudent policy mix has supported a return to price stability while preserving fiscal and financial buffers. The monetary policy rate could be further reduced towards neutral by mid-2025, along with broadly neutral fiscal and macroprudential policies. Structural policies could better support the ongoing transition by reducing administrative burdens and red tape, facilitating the allocation of labour and capital to higher value-added sectors and enterprises, and promoting a more ambitious green transition.
The Czech economy is slowly recovering. After a period of stagnation, growth has picked up in the last three quarters, but has been slow and uneven. Consumer spending has picked up, helped by a recovery in real wages and the first signs of a decline in the household savings rate. Investment, on the other hand, remains weak, hampered by uncertainty about world trade, the impact of tight policies and slow absorption of EU funds.
Inflation has eased. Under the influence of lower commodity prices, restrictive monetary policy and the economic slowdown, headline inflation had reached the Czech National Bank's (CNB) 2% target and remained close to it in the summer. It had moved higher in recent months, mainly reflecting volatile food prices. Core inflation remained above 2 % due to sticky growth in services prices and a recovery in real wages.
Outlook and risks
The recovery should continue next year. As the policy mix becomes more supportive of economic activity and external demand gradually strengthens, growth should gain further momentum. The earlier moderation in wage growth is also supporting the competitiveness of Czech producers in export markets. As a result, growth is expected to accelerate to 2.4 % in 2025 from 1 % projected this year. However, despite the cyclical recovery, weak productivity growth and structural labour shortages will weigh on medium-term potential growth, currently estimated at around 2 %.
Inflation was expected to converge towards the target again. After a further increase in inflation above 3 % in the near term due to the impact of the food price base, inflation should converge back to 2 % by mid-2025, driven by the lagged effect of tight monetary policy and the macroeconomic slowdown.
The risks to growth are on the downside, while the risks to inflation appear to be balanced. Further geoeconomic fragmentation, a weaker-than-expected recovery in key European trading partners, notably Germany, and stronger-than-expected effects of past monetary tightening point to downside risks to growth. These factors will also weigh on inflation. On the other hand, stronger wage growth and higher-than-expected services inflation, together with prolonged commodity price increases, could put upward pressure on inflation.
IMF/ gnews - RoZ
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