Growth amidst challenges: Strong investment and aging workforce dynamics
- Czechia's GDP is projected to grow in 2024 and 2025 after contracting in 2023, with strong investment and inflation significantly decreasing.
- The unemployment rate remains low despite a slight increase, with ongoing pressure on wages due to skilled worker shortages and an aging population.
- The government deficit is expected to decrease steadily from 2023 to 2025, with public debt remaining low relative to EU standards.
Following a 0.3% contraction in 2023, Czechia’s real GDP is projected to grow by 1.2% in 2024 and 3.2% in 2025 as diminishing inflation is expected to bolster purchasing power.
Investments reported a strong growth, boosted by equipment investments, but overall domestic demand declined as inventories were wound down. Despite solid growth in exports, imports recorded a sizeable quarter-on-quarter decline due to reduced domestic demand. Resumption of positive quarterly growth and the improving consumer confidence indicator from 2024-Q1 are expected to drive activity over the year. After two years of decline in household consumption, a turnaround is expected in 2024. Household consumption will be the main driver for economic growth, supported by renewed growth in real wages, improving sentiment and a decreasing savings rate as a result of falling interest rates. Due to a public finance consolidation package, government consumption growth is forecasted to slow down, whereas public investments and equipment investments are expected to grow less strongly. Therefore, the easing of financing conditions and an increase in EU funds inflow should support construction investments going forward.
Forecast Czech Republic: |
|||
|
2023 |
2024 |
2025 |
GDP Growth |
-0,2% |
1,2% |
3,2% |
HICP Inflation |
10,5% |
2,4% |
2,2% |
Unemployment Rate |
2,6% |
2,8% |
2,8% |
In 2023, the unemployment rate increased slightly to 2.6% amid sluggish economic performance and is projected to rise marginally to 2.8% in 2024. This rate presents amongst the lowest in the EU. The labor market is expected to stay constrained, exerting upward pressure on wages. Shortages of skilled workers persist, and population ageing adds additional pressure, limiting potential growth. Wage growth is projected to remain steady, driven by a rise in the minimum wage and modestly higher base pay scales resulting from collective bargaining outcomes.
Headline inflation decelerated from an average of 10.5% in 2023 to 2.4% in 2024 and is expected to decrease to 2.2% in 2025, meeting the CNB’s target of 2.00 % by early 2025. The expiration of government energy price interventions and a rise in network fees contributed to inflation, despite lower wholesale energy prices. Conversely, food prices, both processed and unprocessed, dampened inflation due to reduced wholesale agricultural prices and a cut in food VAT. As the impact of commodity price shocks subsides, wage growth is poised to become the primary inflationary force.
Czechia's 2023 government deficit hit 3.7% of GDP, driven by higher pension costs and energy price interventions, which alone contributed 1.1% of GDP. EU-funded public investment peaked last year. The deficit is expected to shrink to 2.4% of GDP in 2024 with the end of energy subsidies and a fiscal consolidation plan. By 2025, the deficit could further reduce to 1.9% amid stronger GDP growth and rising social contributions. Public debt is low by EU standards, the public debt-to-GDP ratio is projected to rise slightly from 44% in 2023 to 45.5% in 2025, cushioned by GDP growth.
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.
The Czech economy is grappling with significant challenges, including an aging workforce which poses as a major obstacle. Addressing the demographic shift weighing on labor supply and fiscal balances is critical. Urgent structural reforms are needed to direct resources towards higher value-added sectors and hence maintain living standards and support digital and green transformation.
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