Czech Republic

The Czech Republic (Czechia) has been a decent performer among emerging economies. However, a strong dependence on exports (accounting for around 80% of GDP), in particular on automotive shipments, causes above-average cyclical fluctuations in growth. Moreover, a high dependence on global supply chains and energy imports has made the Czech economy very vulnerable in the recent global context of supply disruptions and higher energy prices.

Real GDP expanded by an average of +2.4% over the past 20 years, and by +4.0% over the five years prior to the Covid-19 pandemic. As a consequence of its dependence on exports and supply chains, the Czech economy was hit harder by the global Covid-19 crisis than others (-5.3% in 2020) despite strong economic policy support. And after a solid recovery in 2021 (+4.0% growth), economic activity slowed down markedly in 2022-2023 as a result of the consequences of the war in Ukraine, notably the subsequent EU sanctions on Russia and soaring energy prices. The Czech economy more or less stagnated from mid-2022 to end-2023. Full-year real GDP still posted growth of +2.8% in 2022 but contracted by -0.1% in 2023. Growth remained subdued in the first half of 2024 as weak external demand acted as a constraint on the speed of the recovery. Looking ahead, we expect modest growth of +1% or less in 2024, followed by around +2.5% in 2025.

Inflation has fallen tothe +2% ± 1pp target range of the Czech National Bank (CNB, the central bank) but may edge up again towards the end of 2024. After peaking at 18% y/y in September 2022, consumer price inflation fell back steadily to 6.9% y/y at end-2023 and stood at 2.0% in June 2024 on the back of a correction of the earlier rise in energy prices as well as higher interest rates. The CNB raised its key policy interest rate by a cumulative 675bps to 7.00% from June 2021 to June 2022. Thereafter, the rate was kept unchanged until December 2023 when the CNB kicked off an easing cycle that brought down the rate by a cumulative 250bps to 4.50% in August 2024. Given the weak recovery and low inflation in H1, we expect further but smaller rate cuts in H2 until a temporary uptick in inflation may halt monetary easing towards the end of 2024. Further gradual easing is then likely in 2025.

The Czech business environment is well above average. The World Bank Institute’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are generally business-friendly, though a certain level of corruption is still perceived as present. The Heritage Foundation’s Index of Economic Freedom survey for 2024 assigns Czechia rank 24 out of more than 180 economies, reflecting strong scores with regard to property rights, judicial effectiveness, tax burden, trade freedom, investment freedom and financial freedom. Meanwhile, our proprietary Environmental Sustainability Index puts Czechia at rank 60 out of 210 economies, reflecting strengths in energy use and CO2 emissions per GDP, water stress, as well as its exposure to climate events and its readiness to protect itself against such events. However, there are still weaknesses in renewable electricity output and the recycling rate.

Overall systemic political risk is relatively low. Czechia is a well-established democracy and has good international relations, reflected in its EU, NATO and OECD membership. Fragile coalition governments have often resulted in ineffective policymaking and slow reform progress. Yet, broad policy continuation has been the rule after past government changes, whether early or on schedule.