Czech Republic

The Czech Republic (Czechia) has been a decent performer among emerging economies. However, a strong dependence on exports (accounting for around 80% of GDP), in particular on automotive shipments, causes above-average cyclical fluctuations in growth. Moreover, a high dependence on global supply chains and energy imports has made the Czech economy very vulnerable in the recent global context of supply disruptions and higher energy prices.

Real GDP expanded by an average of +2.5% over the past 20 years and by +3.9% over the five years prior to the Covid-19 pandemic. As a consequence of its dependence on exports and supply chains, the Czech economy was hit harder by the global Covid-19 crisis than others (-5.5% in 2020) despite strong economic policy support. And after a moderate recovery in 2021 (+3.6% growth), economic activity slowed down markedly in 2022-2023 as a result of the consequences of the war in Ukraine, notably the subsequent EU sanctions on Russia and soaring energy prices. The Czech economy has been mostly in recession since mid-2022. Full-year real GDP still posted moderate growth of +2.4% in 2022 but is estimated to have contracted in 2023. Looking ahead, we expect modest growth of around +1% in 2024, followed by +2.5% or so in 2025.

Inflationary pressures will decline but not disappear in 2024. Consumer price inflation rose into double-digit territory in early 2022 amid surging energy and food prices. After peaking at 18% y/y in September 2022, it fell back steadily to 6.9% y/y at end-2023 on the back of a partial correction of the earlier rise in energy prices as well as higher interest rates. The Czech National Bank (CNB, the central bank) raised its key policy interest rate by a cumulative 675bps to 7.00% from June 2021 to June 2022. Thereafter, the rate was kept unchanged until December 2023 when CNB kicked off an easing cycle by a 25bps cut. We forecast inflation to remain elevated for some time and to not fall back to the CNB’s 2% ±1pp target band before 2025. We expect the CNB to continue gradual monetary easing in 2024.

The Czech business environment is well above average. The World Bank Institute’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are generally business-friendly, though a certain level of corruption is still perceived as present. The Heritage Foundation’s Index of Economic Freedom survey for 2023 assigns Czechia rank 21 out of more than 180 economies, reflecting strong scores with regard to property rights, judicial effectiveness, tax burden, trade freedom, investment freedom and financial freedom. Meanwhile, our proprietary Environmental Sustainability Index puts Czechia at rank 59 out of 210 economies, reflecting strengths in energy use and CO2 emissions per GDP, water stress and general vulnerability to climate change. However, there are still weaknesses in renewable electricity output and the recycling rate.

Overall systemic political risk is relatively low. Czechia is a well-established democracy and has good international relations, reflected in its EU, NATO and OECD membership. Fragile coalition governments have often resulted in ineffective policymaking and slow reform progress. Yet, broad policy continuation has been the rule after past government changes, whether early or on schedule.