Macro Monitor Czech Republic

We present an updated outlook on the Czech economy for 2010, 2011 and 2012.

After the sharp economic downturn, especially in the first two quarters of last year, the Czech economy began to stabilise at the end of 2009. Looking ahead, we remain rather conservative on the prospects of economic recovery this year and we expect the Czech economy to stagnate and more precisely, to contract on average by 0.1% y/y in 2010. The main culprit is the continued weakness in private consumption, although investments will disappoint as well. Nonetheless, as domestic demand begins to recover going into 2011, we are slightly more positive on next year’s GDP growth expecting the Czech economy to grow by 3.0% y/y in 2011 (previous forecast was 2.9% y/y). Furthermore, we have revised somewhat up our expectation of 2012 GDP growth and now expect the Czech economy to grow on average by 4.2% y/y in 2012, which is somewhat better compared to our old forecast of 3.9% y/y.

Inflation will remain subdued this year given the weakness in private consumption. We expect average inflation to remain well within the Czech central bank inflation target of 2% – we forecast 1.1% y/y in 2010 and 1.8% y/y in 2011.