The Czech economy slowed down in the last quarter of 2019 to 1.7% year-on-year and 0.2% QoQ. Although some slowdown was expected, the market expected growth of 2% while the central bank and the finance ministry expected 1.9%, so the figure was somewhat disappointing.
We don't know the details yet but household consumption was the main growth factor. For the whole of 2019, the economy accelerated by 2.4% YoY after 2.8% in 2018. However, given the less favourable developments abroad and the weak German growth, we expect Czech GDP to slow to 2% in 2020.
January inflation surprised on the upside and rose from 3.2% in December to 3.6% - the highest level since March 2012. Thus, it exceeded both market expectations of 3.2% and central bank estimates of 3.3%. January inflation is always usually a little difficult to estimate, as many prices are being changed early in the year. Therefore even the range of analysts' estimates was wide-ranging from 2.9 to 3.4%.
Stronger than expected price growth due to food prices, which accelerated by 2.3% month on month and by 4.8% year-on-year in December to 6.3%. Another increase was due to higher prices of spirits, which increased by 11% month-on-month due to an increase in excise duty.
Structure of the inflation in the Czech economy
Inflation will most likely accelerate until April
However, it is very uncertain to what extent this decline in VAT will be reflected in final prices for consumers and to what extent it will remain in the margins of entrepreneurs. For most of this year, inflation should be above the 3% level and be around 3% on average. According to current estimates, inflation of 3.3% in 2012 should not be exceeded.
Today's acceleration in inflation is likely to put an end to market bets that the central bank will cut rates in the second half of this year.
Coincidentally, the Czech central bank started targeting 2% inflation (with a 1 percentage point tolerance on both sides) in January 2010, i.e. ten years ago. Average annual inflation in the last ten years has been 1.7%, so the average price level in the domestic economy has increased by 22% over the last decade. 13 months out of 121 (including January 2020), inflation was above the 3% tolerance level and for 38 months, it was below the 1% lower tolerance level.
However, today's inflation acceleration and its outlook for the first half of the year explains, why the central bank board decided to hike rates in February, backed by four board members including Governor Rusnok, as revealed in the minutes today.
17th February 2023
15th February 2023
16th February 2023
31st March 2023
28th April 2023