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News

Significant decrease of the Czech economy in 1Q confirmed

5.06.2020
Company: Komerční banka, a.s.

As a result of the coronavirus pandemic, the Czech economy dropped 3.3% qoq and 2% yoy. While this was slightly above the first reading from mid-May, the economic downturn has remained substantial. It is important to note that GDP increased 2% yoy at the end of last year. From economic an point of view, the Czech Republic paid for its early introduction of preventive government measures, which prevented the spread of the coronavirus. On a qoq basis, the decrease in GDP was mainly caused by fixed investment, which plummeted around 10%. Household consumption also made a negative contribution and was 2% lower. On the other hand, the slowdown was partly offset by government consumption and net exports. Government consumption increased 5% due to expansive fiscal policy. The better result of foreign trade was given by a larger qoq decrease in imports, compared with exports. The restrictive measures were applied earlier in the domestic economy than in the economies of the country’s main trading partners.

All branches of the economy suffered from the economic lockdown, except for construction, which added 0.7% qoq. Trade, transportation, accommodation and food service were hit the most significantly, and their gross value added decreased 5.4% qoq. The decrease in GVA was also witnessed in manufacturing, which, however, lacked momentum even before the crisis.

Compared with our latest forecast, the results of foreign trade in 1Q are the most significant positive surprise. The annual growth of government and household consumption were also higher than expected. On the other hand, growth in fixed investment was weaker than expected, and the change in inventories was lower, as well.

While the lockdown weighed on GDP growth in 1Q only during the last two weeks, in the second quarter it persisted for over two months. Therefore, a more pronounced decrease in GDP can be expected in 2Q. In the second half of this year, we expect a revival of the Czech economy. However, this will to a large extent depend on the rebound in foreign demand. The performance of the automotive sector will also be crucial, as it is important for the Czech economy. But there are some doubts that the demand for durable goods such as cars will be affected most by the current crisis. For this year, our forecast expects Czech GDP to decrease 6.8% and rise 7.1% in the next year. For more information, see our new Czech Economic Outlook, which are available here https://bit.ly/EcoOutlookQ2.

Although the development of the domestic economy in 1Q was in line with the CNB’s forecast, foreign demand was lower than expected by the CNB’s baseline scenario. It rather corresponds with the CNB’s alternative scenario, which assumes a further decrease in the key repo rate to technical zero. A stronger-than-expected downturn in the economies of our trading partners would also lead with a delay to a deeper recession in the domestic economy. We expect the bank board to decrease the two-week repo rate to technical zero (0.05%) at its next meeting in June.

 

Martin Gürtler

Economic and Strategy Research

Komerční banka

trading.kb.cz

 

Tags: Economics | Finance |

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