OECD Economic Outlook, Volume 2020 Issue 2

Czech Republic

GDP is estimated to contract by 6.8% in 2020, and projected to recover slowly, by 1.5%, in 2021. The economy has been hit hard by lockdown measures and a drop in trade. Additional containment measures, high uncertainty and weak sentiment amid the second outbreak will delay economic recovery until an effective vaccine is widely deployed towards the end of 2021. Fiscal support will help maintain household consumption, but investment will take longer to rebound. The unemployment rate will rise from low levels and inflation will slow.

The authorities reacted swiftly to the pandemic, supporting incomes, employment and liquidity. This supportive stance should be maintained. The central bank can further ease monetary policy in case of persistent weakness, beyond the conventional measures already implemented at the beginning of the crisis. Gradual fiscal consolidation is planned following a supportive budget for 2021. Care should be taken not to tighten fiscal policy too soon. Active labour market policies should be boosted to facilitate labour reallocation.

The Czech Republic is experiencing a strong second wave

The number of cases as well as the number of deaths have risen steeply after the summer, well beyond the numbers in the first wave. A state of emergency has been declared, and a national lockdown reintroduced in October. The government also increased restrictions on certain activities, banning events and gatherings, closing education establishments and severely limiting activity in the hospitality and retail sectors.

Czech Republic: COVID-19 and recovery

1. Sales in retail trade, except of motor vehicles, constant prices.

Source: European Centre for Disease Prevention and Control (ECDC); Czech Statistical Office; and OECD calculations.

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Czech Republic: Demand, output and prices

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The recovery has stalled amid elevated uncertainty and renewed restrictions

Activity picked up soon after the sharp contraction in the first half of 2020. Manufacturing production, retail sales and tourism bounced back, but at the end of the summer the recovery stalled amid the resurgence of the pandemic. The Prague stock exchange PX index and the koruna exchange rate lost value from August to October, after the summer gains. The unemployment rate started to rise from low levels, and wage growth eased markedly. Inflation on the other hand has remained above the upper boundary of the tolerance band (1-3%) for most of the year. While greater slack and lower oil prices have had a dampening effect, the koruna depreciation and rising food and administered prices put upward pressure on prices.

The authorities have appropriately eased policies to support the economy

To help the economy during the crisis, the government introduced job retention schemes, benefit payments to the self-employed, income support to workers caring for children and tax deferrals. Moreover, a COVID‑19 loan and guarantee programme has been launched to boost firm liquidity, and deferrals of rent and loan repayments have been offered. Some of these programmes are now being extended due to the renewed outbreak. The government has submitted to parliament a supportive budget for 2021, with large spending increases on healthcare and investment to promote the recovery. Monetary policy also moved quickly to accommodate the drop in activity and support liquidity by cutting policy rates (from 2.25% to 0.25%) and by lowering the countercyclical capital buffer (from 1.75% to 0.5%). The central bank also broadened the scope of its liquidity‑providing operations.

The recovery will be slow

The continuation of the pandemic, containment restrictions, and low foreign demand will delay and weaken the economic recovery. Assuming a six-week lockdown in the fourth quarter of 2020 and some continuing restrictions in the first half of 2021 on activities requiring close proximity, GDP is projected to grow by 1.5% in 2021 and 3.3% in 2022 after a vaccine becomes deployed in the latter half of 2021. High uncertainty will dampen private consumption and business investment. Firm bankruptcies are expected to rise in 2021 due to prolonged economic weakness and a gradual withdrawal of some support measures. The unemployment rate is expected to continue rising in the first half of 2021. Thereafter, once the pandemic is better controlled globally and locally, economic growth will gather pace on the back of rising trade and domestic demand.

Uncertainty regarding the projections remains high. In case of a prolonged lockdown, private consumption, investment and trade will drop again to low levels. Protracted adversity would significantly increase bankruptcies, and the unemployment rate would surge. The highly open Czech economy is exposed to disruptions in international trade or new trade barriers. On the upside, the current substantial government support could have a stronger positive impact on the economy.

The supportive policy stance remains warranted

The central bank has limited room for further monetary easing using conventional measures. However, in case of prolonged economic weakness, it could consider further reducing interest rates, undertaking asset purchases and longer-term financing operations. According to a new medium-term fiscal framework, the government plans a gradual fiscal consolidation starting in 2022. However, enough flexibility should be preserved to avoid tightening fiscal policy too strongly too soon. Active labour market policies and reskilling programmes should be boosted and insolvency procedures accelerated to facilitate resource reallocation from declining to growing sectors.