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

The economy continued to post solid growth in the second half of 2021, despite mounting challenges to the country’s export-reliant industrial core. Household consumption remained a key growth driver, but gross capital formation also contributed positively through increased inventory stocks, resulting from bottlenecks. However, shortages of components dragged down industrial production and put a damper on exports – even as imports were rising dynamically. Consumer prices surged in the final months of the year, and it is anticipated that they will continue on an upward path well into 2022. As a result, the Czech National Bank became ever more hawkish, bringing the nominal policy rate to a 13-year high in December 2021, with more hikes likely to follow in 2022. While the policy rate remains very negative in real terms, rising rates could nevertheless hamper the post-pandemic recovery. Despite these headwinds, we have revised our forecasts for real GDP growth in 2022 upward to 4% (from 3.7%). This reflects an impressive degree of resilience, alongside an expectation on our part that the bottlenecks will ease later in the year, releasing pent-up exports. It is also anticipated that fixed capital formation will stimulate growth, as investment regains its dynamism. Nevertheless, challenges remain. We expect inflation to stay high in 2022, reflecting continued supply pressures, and the labour market to become stretched. Given the roll-out of support measures in response to rising energy prices, and the potential for virus mutations to limit business activity, there may not be much room for fiscal consolidation, despite the new government’s commitment to maintaining tighter budgets.