WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

The Czech economy grew by 0.2% year on year in Q1 2024 , with household consumption and external demand contributing most significantly. Real wages finally grew for the first time since Q3 2021, providing a much-needed boost to consumer spending for the period ahead. The recovering purchasing power is visible in the dynamic growth of retail sales (5.3% year on year in April), along with improvements in consumer confidence indicators. While inflation fell sharply in the first months of the year and remains reasonably low, the Harmonised Index of Consumer Prices (HICP) again jumped in April, pointing to a likely moderation of disinflationary trends in the future. At the same time, due to the ripple effect of the struggling German economy, Czech industrial production remains stagnant, with no sign of any major improvement on the horizon. Nonetheless, trade in goods has been buoyant, with the growth of exports outpacing that of imports. The strong export performance, especially in motor vehicles, is likely a lagged reflection of last year’s robust industrial production in the sector; but given the current slowdown in production, a partial loss of this momentum is to be expected. All in all, recent developments mostly confirm our previous expectations from the spring forecast – the Czech economy is on track for modest growth this year (1.2%), supported primarily by private consumption; this will be followed by a more extensive revival in subsequent years. On the monetary side, persistent pro-inflationary pressures justify an upward revision of the HICP for 2024 (2.4%; +0.4 percentage points), and a somewhat more conservative progression of the monetary easing cycle by the Czech National Bank, possibly landing at 4.5% at the year-end.