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

The Czech economy performed relatively well in Q1 2022, expanding by 4.8% in annual terms. Household consumption and gross fixed capital formation were the main drivers of this, contributing 3.4 percentage points and 3.1 percentage points, respectively. A similar pace of growth is unlikely to be maintained over the rest of the year, however, as the pandemic-related base effects subside, households become more prudent in their spending, and the impact of the ongoing war in Ukraine is fully reflected in the numbers. Inflation is anticipated to remain high for much of the year and, following a substantial revision upward, is now expected to be in double-digit territory in 2022. Amidst falling real incomes, consumer confidence has hit a 10-year low, denting the ability of household consumption to contribute to growth. At the same time, recovery from the supply-chain shock, further intensified by the war, is apparently going to take longer than anticipated. This will hurt export-oriented industrial economies like Czechia, where net exports will inevitably put a damper on growth. Industrial production already recorded a year-on-year decline of 3.8% in April, partially explained by the strong post-lockdown revival last year. On the other hand, the service sector is driving optimism, as life returns to ‘normal’ and pandemic concerns are packed away. Yet, as consumers tighten their belts, the revival could prove short lived. Given the rather strong and persistent headwinds, the outlook for Czechia has been revised downward, with real GDP expected to grow only modestly, by 1.8% in 2022, and with downside risks dominating.