IMF Executive Board Concludes 2023 Article IV Consultation with Czech Republic
January 29, 2024
Washington, DC: On January 22, the Executive Board of the International Monetary Fund (IMF) concluded the 2023 Article IV consultation [1] with Czech Republic.
Economic activity slowed down notably in 2023 but a rebound is expected in 2024, driven by a recovery in domestic demand. In 2023 real GDP growth is estimated to have declined to -0.4 percent, mainly reflecting a decline in household consumption amidst a significant fall in real wages, deteriorating consumer sentiment, and heightened uncertainty. Growth is projected to increase to about 1.2 percent in 2024, mainly driven by consumption and fixed investment, as inflation declines, and real wages recover. Inflation is projected to meet the Czech National Bank’s target by early 2025. The ongoing disinflation reflects the diminishing impact of price shocks from commodity prices and a substantial decrease in domestic demand pressures. This is apparent in falling core inflation, which primarily reflects the dampening effect of the tight monetary policy stance. Continued drops in commodity prices (food and fuel) are expected to support a fall in administered price inflation.
Risks to the growth outlook are tilted to the downside and risks to inflation are tilted to the upside. Spillovers from a weaker global outlook remain a downside risk. Economic activity and inflation could negatively be affected by a possible renewed surge in global energy prices, new supply chain disruptions or an increase in geopolitical tensions, and potential broader geo-economic fragmentation. Heightened global financial volatility due to stress in global financial markets could negatively impact pricing and availability of financing. Risks to inflation relate to inflation expectations becoming untethered—against the backdrop of high inflation, a tight labor market and the currently elevated but declining saving rate. Moreover, inflation pressures could also arise from strong wage growth and a failure of profit margins to compress rapidly in an environment of recovering growth, resulting in stronger repricing of goods and services. Also, inflation expectations could rise if new global energy or commodity price shocks arise or if the expected increase in administered prices reverses the downward inflation momentum. Additionally, an abrupt return of the household saving rate to near long-term average levels could boost household consumption and heighten demand driven inflationary pressures. A falling differential in policy rates vis-a-vis major central banks or geopolitical shifts in regional sentiment could exert depreciation pressure on the koruna and add to inflationary pressures.
Executive Board Assessment[2]
Executive Directors commended the authorities for maintaining macroeconomic and financial stability amidst challenging conditions and welcomed the expected economic recovery in 2024. Noting the elevated downside risks to the outlook, Directors encouraged the authorities to maintain their prudent macroeconomic policy mix to ensure price stability and continue to implement necessary structural reforms to facilitate the green and digital transformation of the economy.
Directors agreed that maintaining a tight monetary policy stance remains appropriate to ensure inflation returns to target in a timely manner. Noting the recent policy actions, Directors concurred that the central bank should adopt a cautious, data‑driven approach to potential further rate cuts.
Directors welcomed the authorities’ commitment to fiscal prudence and emphasized the need to remain flexible given the uncertain outlook. If current conditions persist, Directors broadly concurred that further fiscal consolidation is needed to support the disinflation efforts and reach the medium‑term objective in the Fiscal Responsibility Act by 2028. Such efforts could also help build fiscal buffers in the face of aging pressures and can support economic transformation. Directors also emphasized the importance to protect the most vulnerable and welcomed the authorities’ commitment to pension system reforms.
Directors welcomed the resilience of the financial sector, noting that banks are well‑capitalized, liquid, and profitable while asset quality remains strong. They concurred that macroprudential policy settings are broadly adequate but called for vigilance as pockets of vulnerabilities warrant close monitoring, including in the housing market, foreign currency corporate loans, and cyber security. A number of Directors found no immediate need to reactivate debt‑ and debt‑service to income ratios, at this stage. Directors welcomed improvements in risk‑based supervision and encouraged further progress in this area. They concurred that efforts to strengthen the safeguards against AML/CFT risks should be continued.
Directors agreed that addressing structural challenges arising from the
country’s demographic dynamics and the global energy transition will be
critical to maintain sustainable growth. They highlighted that structural
reform policies should facilitate the reallocation of labor and capital and
advance technological innovation to support economic transformation,
including towards a greener and more digitalized economy. They welcomed the
authorities’ decarbonization strategy and noted the need for continued
efforts to meet the country’s climate targets.
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Czech Republic: Selected Economic Indicators, 2020–28 |
|||||||||
|
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
|
|
Staff projections |
|||||||||
|
NATIONAL ACCOUNTS |
|||||||||
|
Real GDP (expenditure) |
-5.5 |
3.5 |
2.4 |
-0.4 |
1.2 |
2.5 |
2.7 |
2.6 |
2.5 |
|
Domestic demand |
-5.6 |
8.2 |
2.6 |
-3.7 |
0.6 |
2.3 |
2.6 |
2.6 |
2.7 |
|
Consumption |
-4.1 |
3.3 |
-0.3 |
-1.5 |
2.2 |
2.4 |
2.7 |
2.6 |
2.5 |
|
Public |
4.2 |
1.4 |
0.6 |
2.5 |
1.1 |
1.1 |
1.2 |
1.4 |
1.4 |
|
Private |
-7.2 |
4.1 |
-0.8 |
-3.2 |
2.6 |
3.0 |
3.3 |
3.2 |
3.0 |
|
Investment |
-9.3 |
20.4 |
8.8 |
-8.2 |
-2.7 |
2.1 |
2.5 |
2.7 |
3.0 |
|
Exports |
-8.0 |
6.8 |
7.2 |
2.7 |
2.5 |
5.0 |
5.1 |
5.2 |
5.4 |
|
Imports |
-8.2 |
13.2 |
6.3 |
-0.3 |
1.9 |
4.9 |
5.1 |
5.3 |
5.3 |
|
Contribution to GDP |
|||||||||
|
Domestic demand |
-5.1 |
7.8 |
1.5 |
-3.0 |
0.6 |
2.2 |
2.5 |
2.5 |
2.5 |
|
Net exports |
-0.4 |
-4.3 |
0.9 |
2.6 |
0.6 |
0.4 |
0.2 |
0.1 |
0.0 |
|
Investment (percent of GDP) |
26.5 |
26.0 |
26.8 |
25.9 |
26.2 |
25.6 |
25.5 |
25.6 |
25.7 |
|
Gross domestic investments (percent of GDP) |
26.2 |
30.2 |
32.2 |
28.9 |
27.2 |
26.7 |
26.5 |
26.5 |
26.6 |
|
Gross national savings (percent of GDP) |
28.1 |
27.5 |
26.0 |
28.1 |
27.0 |
27.0 |
27.4 |
28.0 |
28.6 |
|
Output gap (percent of potential output) |
-0.6 |
0.8 |
0.4 |
-0.5 |
-0.3 |
0.0 |
0.5 |
0.1 |
0.0 |
|
Potential growth |
-2.2 |
2.1 |
2.8 |
0.5 |
1.0 |
2.2 |
2.2 |
2.9 |
2.6 |
|
LABOR MARKET |
|||||||||
|
Employment |
-1.4 |
0.3 |
-1.6 |
-0.1 |
0.9 |
-0.6 |
-0.4 |
-0.1 |
0.3 |
|
Total labor compensation |
1.5 |
6.1 |
7.9 |
6.8 |
4.9 |
3.9 |
4.3 |
4.4 |
4.8 |
|
Unemployment rate (average, in percent) |
2.4 |
2.7 |
2.1 |
2.7 |
2.6 |
2.5 |
2.4 |
2.4 |
2.4 |
|
PRICES |
|||||||||
|
Consumer prices (average) |
3.2 |
3.8 |
15.1 |
10.6 |
2.8 |
2.0 |
2.0 |
2.0 |
2.0 |
|
Consumer prices (end-of-period) |
2.3 |
6.6 |
15.8 |
7.4 |
2.9 |
2.0 |
2.0 |
2.0 |
2.0 |
|
Producer price index (average) |
0.1 |
7.1 |
… |
… |
… |
… |
… |
… |
… |
|
GDP deflator (average) |
4.3 |
3.3 |
8.6 |
9.0 |
3.7 |
2.2 |
1.6 |
1.7 |
2.0 |
|
MACRO-FINANCIAL |
|||||||||
|
Money and credit (end of year, percent change) |
|||||||||
|
Broad money (M3) |
10.0 |
6.8 |
6.1 |
8.5 |
4.9 |
4.8 |
4.3 |
4.3 |
4.6 |
|
Private sector credit |
3.6 |
8.9 |
5.0 |
4.5 |
4.0 |
3.5 |
3.5 |
3.5 |
3.5 |
|
Interest rates (in percent, year average) |
|||||||||
|
Three-month interbank rate |
0.9 |
1.1 |
… |
… |
… |
… |
… |
… |
… |
|
Ten-year government bond |
1.1 |
1.9 |
4.2 |
1.2 |
1.7 |
1.7 |
1.7 |
1.7 |
1.7 |
|
Exchange rate |
|||||||||
|
Nominal effective exchange rate (index, 2005=100) |
99.7 |
103.6 |
… |
… |
… |
… |
… |
… |
… |
|
Real effective exchange rate (index, CPI-based; 2005=100) |
100.0 |
104.6 |
… |
… |
… |
… |
… |
… |
… |
|
PUBLIC FINANCE (percent of GDP) |
|||||||||
|
General government revenue |
41.5 |
41.4 |
41.4 |
42.6 |
41.9 |
41.6 |
41.5 |
41.5 |
41.4 |
|
General government expenditure |
47.2 |
46.5 |
44.6 |
46.2 |
44.1 |
43.3 |
43.0 |
42.6 |
42.2 |
|
Net lending / Overall balance |
-5.8 |
-5.1 |
-3.2 |
-3.6 |
-2.2 |
-1.7 |
-1.5 |
-1.2 |
-0.8 |
|
Primary balance |
-5.2 |
-4.5 |
-2.7 |
-2.8 |
-1.2 |
-0.7 |
-0.5 |
-0.2 |
0.2 |
|
Structural balance (percent of potential GDP) |
-5.5 |
-5.4 |
-3.4 |
-3.4 |
-2.1 |
-1.8 |
-1.8 |
-1.3 |
-0.8 |
|
General government debt |
37.7 |
42.0 |
44.2 |
44.2 |
44.3 |
44.2 |
44.0 |
43.6 |
42.5 |
|
BALANCE OF PAYMENTS (percent of GDP) |
|||||||||
|
Trade balance (goods and services) |
6.7 |
2.8 |
-0.1 |
3.5 |
3.9 |
4.9 |
5.0 |
5.0 |
5.0 |
|
Current account balance |
2.0 |
-2.8 |
-6.1 |
-0.9 |
-0.2 |
0.3 |
1.0 |
1.5 |
2.0 |
|
Gross international reserves (billions of euros) |
135.4 |
153.3 |
131.3 |
140.3 |
149.3 |
158.3 |
166.3 |
172.3 |
176.9 |
|
(in months of imports of goods and services) |
11.9 |
11.0 |
7.6 |
8.4 |
8.8 |
8.9 |
8.8 |
8.5 |
8.2 |
|
(in percent of short term debt, remaining maturity) |
142.8 |
136.7 |
116.2 |
117.5 |
119.3 |
122.4 |
126.5 |
131.2 |
137.0 |
|
MEMORANDUM ITEMS |
|||||||||
|
Nominal GDP (USD billions) |
246.0 |
281.8 |
290.5 |
335.5 |
350.4 |
368.4 |
385.1 |
400.1 |
416.8 |
|
Population (millions) |
10.7 |
10.5 |
10.8 |
11.0 |
11.1 |
11.1 |
11.0 |
11.0 |
11.0 |
|
Real GDP per capita |
-5.6 |
5.4 |
-0.6 |
-2.0 |
0.4 |
2.8 |
3.0 |
2.9 |
2.8 |
|
GDP per capita (USD thousands) |
22.98 |
26.79 |
26.83 |
30.50 |
31.61 |
33.33 |
34.94 |
36.42 |
38.06 |
|
Sources: Czech National Bank; Czech Statistical Office; Ministry of Finance; Haver Analytics, and IMF staff estimates and projections. |
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Structural balances are net of temporary fluctuations in some revenues and one-offs. COVID and energy price-related one-offs are however included. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
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