High inflation will slow Czech economyʼs recovery

Significance

The economy is in ‘technical recessionʼ, having contracted in two consecutive quarters. This is mainly due to falling household consumption, stemming from rapid inflation and the concomitant decline in purchasing power. Czechia has one of the highest inflation rates in the EU; it reached 17.5% in January.

Impacts

• Despite the improving economic outlook, a gradual rise in unemployment is expected this year, albeit to a relatively low 3-4%.
• Persistent labour market tightness will push wage growth, which will still lag behind inflation; real wages are expected to fall again.
• The automotive sectorʼs ability to support growth may be restricted by shortages of components.
• The governmentʼs fiscal consolidation plan aims to reduce the structural deficit by at least 1 percentage point to below 3% of GDP in 2024.