Czechia: Economic development is expected to improve further
The Czech economy is still undergoing a gradual recovery, expected to strengthen this year and the next. In addition to continued favorable consumption trends, this will be supported by a gradual improvement in foreign demand. However, this development will depend on any potential trade war with the US, which could result in weaker GDP growth. The labor market outlook remains positive. Although the unemployment rate may rise slightly, it will remain very low overall, and real wages, which returned to growth in 2024, are expected to continue rising. Inflation remains elevated at the beginning of this year, but it is still within the tolerance band around the inflation target. Throughout this year, inflation is expected to slow slightly, a trend that should continue into next year.
The CNB will continue its gradual rate cuts, facilitated by low inflation and weak economic growth that does not generate significant inflationary pressures. On the other hand, we now expect only a slight overall reduction in rates, as the CNB's main rate is already close to the neutral level, and the anticipated economic recovery will exert upward pressure. The koruna's exchange rate reflects uncertainty in the global economy, which could lead to increased volatility in its development. Over this year and next, we expect a slight strengthening of the koruna in our baseline scenario. However, we see risks as highly asymmetric, skewed towards the weaker side, primarily due to global and geopolitical factors.
Author
Erste Bank Research Team
Erste Bank
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