Czech recovery carries on but household spending disappoints

The revised estimate confirmed the expansion of the Czech economy in the second quarter 2024, with real GDP adding 0.3% from the previous quarter and 0.6% from a year earlier. The main growth drivers were final consumption expenditure and gross fixed capital formation, while the change in inventories had a negative impact.

Final consumption expenditure rose by 0.6% from the preceding quarter of which household consumption increased by 0.2%, while government consumption expenditure added 1.5% from the previous quarter. Gross fixed capital formation returned to growth, picking up by 1.9% in quarterly terms. Exports added 0.6%, and imports gained 0.7% from the last quarter. The return to growth of fixed investment especially represents cheerful news for the Czech economic outlook, while consumers were less keen on spending than before.

In annual terms, final consumption expenditure expanded by 2.0%, of which household consumption rose by 1.0%. Purchases of non-durable goods and services were the main driver of household spending. Government consumption expenditure picked up by 4.3% from a year earlier, flying relatively high compared to the historical average of 2.6% observed between 2016 and 2019. Gross fixed capital formation rose by 0.7% from a year earlier, leaving behind the sluggish performance of the past three quarters. Exports grew 0.4% year-on-year due to a substantial increase in services exports, while imports fell by 1.5% from a year earlier. That said, we have seen apparent weakness in both exports and imports for the whole year, given that the historical standard suggests annual growth of around 4% for each.

The upward revision in 2Q annual GDP growth reflects a stronger 1Q quarterly figure, which was revised almost 0.2 percentage points towards a better performance. With this first quarter revision in mind, our whole year expected real expansion would be revised toward 1% ceteris paribus. Overall, the Czech economic recovery continues, but household spending in the second quarter was disappointing, raising some questions about whether consumers' appetite for spending is losing steam. In contrast, government consumption clearly gained pace over the past two quarters. The robust comeback of fixed investment is welcome news, as it signals that firms are possibly waking up from a protracted sleep.

The first quarter upward revision impacts the whole-year figure mainly in a technical manner. It must be reflected in a higher growth figure for the whole year, as a 0.2ppt upward revision in the first quarter has a straightforward impact. However, when looking forward, the hard and soft data point to less pronounced household spending in the second half of the year. We will get a bit more clarity on consumer attitudes with the real retail sales data release next Thursday. Meanwhile, consumer sentiment has tanked in the past three months. This requires a reasonable degree of prudence when it comes to the growth outlook, which is surrounded by a thicker fog of uncertainty. Overall, we stick to our headline scenario of a continued gradual recovery, with a 1% whole-year economic expansion. However, an adverse scenario is gaining a bit more prominence due to the observed deterioration in consumer sentiment and an expected slowdown in real wage growth.

The loftier annual GDP growth will likely lend support to the Czech National Bank in keeping a hawkish tone during its September meeting. At the same time, the relatively tight monetary policy setup with real interest rates hovering around 2.5% and an outlook for softer inflation in the coming months will likely tilt the Board’s decision toward a 25bp cut that we expect. Less robust wage growth and crumbling consumer sentiment might result in headline inflation going below target for a couple of months. Yet, policymakers have clarified that sub-target inflation is fine with them for some time.