Hard Brexit and trade war main external risks to Czech economy, bank association says

By bne IntelliNews July 26, 2018

The Czech economy should grow 3.3% in 2018 but slow to 2.9% GDP growth next year, the Czech Banking Association (CBA) said in its latest prognosis, released on July 26. The forecast is 0.3 percentage points (pp) worse for 2018 and 0.1pp better for 2019 than the April outlook.

The outlook, entitled "The sky has been covered with a Brexit cloud", sees the Czech economy as reaching its peak and a soft-landing on the horizon, with the main risks external. 

“We have to be careful with forecasting. Risks for the global economy such as Brexit or trade wars are increasing, but their quantification is not possible,” Komercni Banka chief economist Jan Vejmelek said in a note.

CSOB economist Petr Dufek said that the Czech economy is hitting its limits. "Without further investment, it has nowhere to go with the current labour shortage."

The CBA outlook is more conservative than the latest OECD prediction of 3.8% growth in 2018 and 3.2% in 2019. In turn, the OECD outlook is well above the latest European Commission forecast predicting Czech GDP will expand by 3% in 2018 and by 2.9% in 2019.

In May, the EC predicted growth of 3.4% in 2018 and 3.1% in 2019 while Czech institutions predicted a stronger expansion. The Czech National Bank said in May said the economy should grow by 3.9% in 2018 and by 3.4% in 2019. The forecast is similar to the one published by the Czech finance ministry and the CBA. The former is more optimistic and for 2019 forecasts a 3.3% growth of the economy.

The CBA predicted the central bank will raise interest rates by up to 1 pp by the end of 2019. Headline inflation should hold slightly above the central bank's 2% target. The currency should firm from the current 25.60 against the euro to 24.80 in 2019.

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