Updated economic forecast

The Confederation of Industry of the Czech Republic (SP CR) has prepared an updated spring forecast. This analysis is based on available data or our survey to estimate the development of crucial factors and indicators for the years 2021 and 2022.

Dynamics of Development in 2020
The year 2020 was affected by an initial shock which hit the whole economy, then a high rate of uncertainty, postponing of investments, price growth of costs, and decrease of profits which for many companies was typical for all of 2020. All of society was affected by repeated restrictive measures, which changed many expenditure and investment plans of citizens and companies alike. Instead of an expected slight gradual decrease there was the deepest fall of the GDP indicator in the history of modern Czech Republic (i.e. since 1993).

The dynamics of development of the main GDP indicators differ: domestic consumption was “frozen” by restrictive measures caused by the coronavirus or some voluntary reaction of companies (in Czech Rep. some important companies stopped production based on the fear of the virus spreading) and a massive impact on consumption of households came again during the end of the year 2020 (when another lockdown occurred). The consumption of the government, thanks to support programmes, rose. Investment decreased steadily and the highest cumulative fall in investment was during the end of the year 2020 (some investment plans were finished and other investment plans had not been started, or had been postponed or outright cancelled). Foreign trade was paralysed in the beginning of corona-crisis. Nevertheless, in the following months it was able to resume even under difficult conditions. The final satisfactorily good result of foreign trade in 2020 was supported by strong foreign demand.
The role of industry remains crucial for the results of the whole economy. Industry in the Czech Republic after the springtime “freezing” and stopping of production in some areas was able to eliminate some dips in economic activity. Industrial production, which fell 35% in the spring, managed to only fall to a 7% annual decrease in 2020.

Basic elements of our forecast
The forecast for GDP 2021 is affected by the health situation and by uncertainties connected to specifics of the corona-crisis, especially the bad default situation of comparative year 2020, foreign development of the corona-crisis and the pace of recovery of main leading economies. Other factors are the consumer temper and accumulated resources (savings of households caused by postponement of consumption expenditures) and economic results of companies and their perception of the future. Our forecast is based on the latest surveys and investigations completed by the Confederation of Industry of the Czech Republic. From the data, it is obvious that companies are now less pessimistic in their evaluation of domestic and foreign demand than before. Even expectations of contracts are more optimistic in the beginning of 2021 than in previous quarters. In other words – in the short horizon there is caution about the future, in the longer horizon there is mild optimism.

Our forecast is in line with other predictions of other relevant institutions. Based on our discussions with member companies of our Confederation we anticipate that the economic mood will slowly get better in the spring 2021. The confidence in economic growth is being restored. Nevertheless, the real situation of companies in different sectors obviously differs. These differences are based on the regulatory environment in specific sectors, sensitivity to the increase of costs of crucial inputs, the rate of sector digitalisation, and impacts of government restrictions on specific sector.

Main components of GDP in 2021
We expect the average growth of GDP for 2021 to be between 3.0 % – 3.5 %. Consumption of households will revive after big dips in 2021 but there will still be a significant negative influence from government restrictions on the annual average. Our forecast hopes that another hard lock-down will not occur for the rest of 2021. Under these conditions we predict 1% growth for consumption of households.

Government consumption will maintain at its current pace of growth and the resulting increase will be at level of more than 2%. Government consumption will serve as stabilising factor for the resulting growth rate of GDP in 2021. However, some of current government expenditures are not in line with the idea of long term and sustainable economic growth and development.

Investment expenditures can reach 2.1% growth based on the expected recovery of the economy in the second half 2021. We anticipate a strong investment mood among entrepreneurs, driven by the necessity of finishing previously postponed investment plans. The positive results of gross fixed capital formation will be influenced by recovery plans sponsored by the EU or government programmes.

We except gradual improvement in the area of foreign trade, both imports and exports will experience more than 5% growth rate based on the situation abroad.

Year 2022
There will be continuous economic recovery, based on current calculations that use the latest data. We expect growth at approximately the level of 4%. We are declaring expected growth on an annual basis from the year 2021 here on out, which we consider to be a post-crisis period where growth will not be lower than in 2020. We anticipate growth among most of main GDP components in 2022 but with some differences in these components. Compared to the results of 2021, there will probably be a lower growth rate in foreign trade, but it will be still growth. We think that government spending will be impacted by the necessity of fiscal consolidation (e.g. increased debt will be paid to creditors and government must face higher interest rates for its own debts). Overall growth of households’ consumption and investment will be crucial components.

Authors: Vladimír Štípek and Bohuslav Čížek
Translation: Vladimír Štípek
Czech full version of our forecast (published in June 2021) you can find here.