Czechia: Favorable economic development expected to continue

The Czech economy is undergoing a gradual recovery that is expected to continue over the next two years. Currently, it is primarily driven by strong household consumption, positively influenced by labor market developments. Conversely, foreign trade and private investments are hindered by weak macroeconomic conditions in Germany, global economic uncertainty, and US tariffs. We anticipate a similar trend next year. However, in 2027, growth could accelerate, primarily due to improved foreign demand. The labor market will remain favorable over the next two years, though it will experience a slight cooling compared to this year due to restrictive rate setting and the weaker condition of the German automotive industry.

Inflation is expected to remain slightly above the target on average for the rest of this year and the next two years. Strong domestic inflationary pressures should gradually weaken, contributing less to inflation during 2026 compared to this year. However, heightened risks are anticipated for 2027, primarily related to ETS2. There is also a risk of intensified fiscal expansion following this year's parliamentary elections. Due to these factors, the CNB has shifted to a more hawkish stance. The most likely scenario now is medium-term rate stability of the key rate, in our view, with a reduction expected around mid-2027. Risks are elevated, and a rate cut next year cannot be ruled out. The koruna should continue to strengthen gradually, although at a slower pace than this year. Overall, both CNB policy and koruna development will depend on global trends.

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