After contracting sharply in 2020, GDP is projected to recover by 3.3% and 4.9% in 2021 and 2022, respectively. The Czech Republic has experienced one of the highest infection and death rates in the OECD area and progress in vaccinations has been relatively slow, delaying the relaxation of containment measures. The recovery will nevertheless gather pace in the second half of 2021, once the population is more extensively vaccinated, triggering a rebound in services and boosting private consumption and investment. Inflation has picked up due to rising food and fuel prices. It is expected to remain between 2 and 3% in the latter half of 2021 and in 2022. Unemployment will start to decline.
Policy appropriately remains very accommodative. The government deficit will rise further in 2021, due to recent changes in taxation and the extension of emergency measures to support incomes, employment and hard-hit sectors. A gradual fiscal consolidation is planned thereafter. The fiscal measures should shift to facilitating job transitions and targeting poverty and deprivation. For now, the Czech National Bank should maintain an accommodative stance. A gradual rise in interest rates is projected to begin towards the end of 2021.