2023 is expected to be a year of stagnation, Czech industry will stagnate and the annual inflation rate is likely to remain in double digits despite the decline in price level growth

Although high inflation affects companies and households, the Czech GDP will still grow significantly this year, despite high energy costs. Next year, however, the economy will stagnate, and industry, which usually drives the economy, will slow down. Even if price growth slows down over the next year, relatively high inflation will characterize 2023. The forecast assumes stable energy supplies and a functioning energy price cap system. This follows from the results of the Czech Chamber of Commerce National Economic Forecast.

The stagnation of the economy will be mainly due to two opposing factors – the positive contribution of foreign trade will be offset by a change in inventories. Slightly higher government consumption and lower household consumption will cancel each other out. Although the Chamber of Commerce expects a slight year-on-year increase, the gross fixed capital formation will not ensure GDP growth. Although the not-very-strong koruna will not significantly dampen the imported component of inflation (high prices of imported inputs), it will have a pro-export effect.

Despite a strong migration wave and lay-offs in the business sector due to continued high prices of energy and other production inputs, the excess of labour demand over labour supply, including structural imbalances, will continue. The tight labour market situation will lead to nominal wage growth, but wages will fall in real terms. While the real wage decline will negatively affect the population, it will also have an anti-inflationary effect.

The origin of the 10% inflation rate will be both external (prices of energy, materials, components, and other inputs) and domestic – extensive fiscal policy, especially high mandatorily and quasi-mandatorily expenditures of the state budget (pensions and other social benefits and salaries of public sector employees) will play a significant role.

New revenue titles of the state budget could cover compensatory measures for entrepreneurs. Despite the expected rather conservative monetary policy (we do not foresee continuous massive intervention purchases of the czech crown by the CNB), this will not increase the competitiveness of Czech industry and will weaken its investment opportunities, which will contribute to the stagnation of industry next year. On the other hand, the confluence of levies on market income and windfall profits tax may lead to the relocation of some large firms to countries with more favourable tax burdens. The lower intensity and effectiveness of domestic compensation measures compared to the expected state support in Germany, other EU Member States, and the US is also a risk.

In preparing the Chamber’s National Economic Forecast, the Czech Chamber of Commerce used, among other things, outputs from surveys of its more than 16,000-strong membership base.

Source: komora.cz