CZSO: Economy went into recession; CNB: The performance of the economy was below expectations

ČSÚ: Economy went into recession; CNB: Economic performance was below expectations; m

Czech Statistical Office. Illustrative image.

Prague – The Czech economy went into recession in the fourth quarter of last year, when the gross domestic product (GDP) fell by 0.4 percent compared to the third quarter. Year-on-year, GDP increased by 0.2 percent in the fourth quarter. According to a revised estimate, the economy grew by 2.4 percent for the whole of last year. Statisticians thus worsened their estimate from the end of January, when they reported growth of 2.5 percent. The Czech Statistical Office (CZSO) informed about this today. The economy is in recession mainly because of low household consumption, analysts agree. They expect a slight recovery from the second quarter.

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The economy went into recession, it grew by 2.4% for the whole year, the CZSO reported

“The main drivers of annual growth were gross capital formation expenditure and foreign demand,” the statisticians said. The formation of gross fixed capital was 6.2 percent higher than in 2021. Investments in other buildings and constructions and means of transport grew mainly. The balance of foreign trade ended in the negative after 19 years, when it fell by 187.6 billion crowns year-on-year to minus 8.3 billion crowns. Household final consumption expenditures fell by 0.9 percent last year, while government institutions' final consumption expenditures increased by 0.7 percent.

GDP grew in each quarter last year in a year-on-year comparison, but growth gradually slowed down. In the first quarter it was by 4.7 percent, in the second by 3.5 percent, in the third by 1.5 percent and in the last by 0.2 percent.

“However, the accumulation of barriers in the form of a high rate of inflation, energy prices and other uncertainties gradually affected economic performance, and in the second half of the year the economy began to slow down. Although, fortunately, the negative scenarios of extreme energy prices or natural gas shortages were not confirmed, the economy contracted for the second time quarter-on-quarter behind us and we have entered a technical recession,” said Bohuslav Čížek, chief economist of the Union of Industry and Transport of the Czech Republic. According to him, however, the worst fears from the summer did not come true and the economy showed growth throughout the year.

The balance sheet in the fourth quarter of last year was mainly negatively affected by falling expenditure on final household consumption. They decreased by 5.5 percent year-on-year. People bought less mainly durable goods. “Expenditures on food also decreased significantly, which decreased by more than ten percent year-on-year, but the decrease was also recorded for other items. Only expenditures for services increased,” said Vladimír Kermiet, director of the National Accounts Department of the CZSO.

Analysts expected that in the last three months of last year GDP would drop by several tenths of a percent quarter-on-quarter. It means that the Czech economy entered a technical recession in the second half of 2022. Economists define it as a quarter-on-quarter decline in seasonally adjusted real quarterly GDP in at least two consecutive periods. In the third quarter of last year, the economy fell by 0.3 percent quarter-on-quarter.

The performance of the economy in the fourth quarter was slightly below the CNB's expectations

The performance of the Czech economy in the last quarter of last year ended slightly below the expectations of the Czech National Bank (ČNB). Above all, the decline in household consumption was more pronounced than the central bank had anticipated. On the contrary, government consumption and investments were higher than the CNB expected. Petr Král, director of the monetary section of the CNB, informed about this today. The Czech economy grew by 0.2 percent year-on-year in the fourth quarter, the central bank predicted growth of 0.5 percent in its February forecast.

“Published data on economic activity confirm that the Czech economy entered a shallow recession in the second half of last year. Household consumption, which is affected by a deep drop in real incomes and deteriorating sentiment, fell more significantly in the fourth quarter compared to the CNB's expectations,” said Král. While the CNB predicted a drop in consumption by 3.3 percent, it actually decreased by 5.5 percent.

The Central Bank expects GDP to decrease by 0.3 percent this year as a whole. “The slowdown of the economy will be concentrated mainly in the first half of the year, while the worsening financial situation of households, the slowdown in the growth of foreign demand and fading problems in global logistics will have a negative effect on its performance,” Král said.

According to the King, economic recovery should come in the second half of the year. “The end of difficulties with the supply of materials and components for production during the year will gradually support export activity and net exports will significantly contribute to the start of the economy. At the turn of this year and next year, there will also be a revival of private consumption thanks to the end of high inflation and the restoration of real wage growth,” he said. Next year, he expects GDP growth of over two percent.

Analysts: Behind the recession is a drop in consumption, recovery will come in the 2nd quarter

The Czech economy went into recession in the last quarter of last year mainly due to low household consumption. Analysts agree on this when evaluating the revised estimate of GDP development, published today by the CZSO. A moderate economic recovery is expected from the second quarter of this year, GDP growth for the whole year will be close to zero.

“The main pain point of the Czech economy continues to be household consumption, which has been declining for the fifth quarter in a row. And while the economy as a whole is not far from the pre-Covid 2019 performance, household consumption is almost eight percent below it. In the fourth quarter, household spending continued to decline not only on durable goods, but also spending on basic goods, including food,” Patria Finance Chief Economist Jan Bureš pointed out.

“The decline in the real purchasing power of the population caused by high inflation led to a further significant reduction in the real purchases of goods and services by households, which also accelerated at the end of the year. From the point of view of own consumption, we have thus moved even further away from the level reached just before covid,” said the Bank's chief economist Creditas Petr Dufek. “With high inflation, (the economy) does not have a chance to bounce back from the current bottom, because for the majority of the population, it is precisely inflation that reduces the purchasing power and, moreover, keeps them in a relatively high degree of uncertainty,” he added.

“In the first quarter of this year, with all we will probably see a drop in GDP in year-on-year terms as well,” said Generali Investments CEE Chief Economist Radomír Jáč. In the fourth quarter of last year, GDP grew by 0.2 percent year-on-year. “In quarter-on-quarter terms, GDP performance could stabilize in the first quarter of this year, and GDP will return to quarter-on-quarter growth from the second quarter,” Jáč added. For the whole year, he expects GDP growth of no more than 0.5 percent.

“The full-year result will probably be close to stagnation and it is only a question of whether it will be positive or negative. We also expect that the first quarter of this year will show a decline GDP, but a gradual turnaround will start from the second,” says UniCredit Bank Chief Economist Pavel Sobíšek.