Czech Republic country note: OECD Economic Outlook, May 2021

 39

Czech Republic 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.

The pandemic has been difficult to control The Czech Republic has grappled with a severe public health crisis as the pandemic unfolded. By end-April 2021, it had recorded 273 COVID-19 related deaths per 100 000 inhabitants in cumulative terms, more than double the EU average. To control the ravaging pandemic, strict containment measures were put in place, including the closure of schools and much of the retail sector and services. In spring 2021, the vaccination campaign gathered pace, albeit more slowly than in peer countries. A gradual relaxation of containment measures started from mid-April onwards.

Czech Republic The pandemic has been difficult to control

Further tightening of containment measures undermined the economic recovery

Daily deaths 7-day m.a. per 100 000 2.5

Balance, s.a.

20

Index 2018 = 100, s.a.

120

Czech Republic OECD

2.0

10

110

0

100

-10

90

-20

80

1.5

1.0

0.5

← Consumer confidence

-30

70

Sales in retail trade¹ → Manufacturing production index →

0.0 0 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21

-40

2018

2019

2020

60 2021

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

Source: OECD calculations based on Our World in Data; and Czech Statistical Office.

StatLink 2 https://stat.link/1we4p8

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021

40 

Czech Republic: Demand, output and prices 2017

2018

Current prices CZK billion

Czech Republic GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Consumer price index Core inflation index2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2019

2020

2021

2022

Percentage changes, volume (2015 prices)

5 117.4 2 422.0 958.7 1 275.7 4 656.4 73.1 4 729.5 4 048.4 3 660.5 387.9

3.2 3.5 3.8 10.0 5.3 -0.5 4.7 3.7 5.8 -1.2

2.2 3.0 2.2 2.2 2.6 -0.2 2.4 1.2 1.3 0.0

-5.6 -5.2 3.5 -8.1 -4.2 -1.4 -5.6 -6.0 -6.1 -0.3

3.3 1.1 3.8 -2.4 0.8 -0.8 -0.1 13.3 9.5 3.4

4.9 5.6 0.5 7.8 4.9 0.0 5.0 6.1 6.5 0.4

_ _ _ _ _ _ _ _ _

2.6 2.1 2.4 2.2 7.5 0.9 39.7 32.0 0.4

3.9 2.8 2.5 2.0 7.8 0.3 37.7 30.3 0.3

4.2 3.2 3.6 2.5 14.2 -6.2 47.0 38.1 3.6

3.1 2.4 2.9 3.5 13.3 -8.7 54.8 45.9 5.2

2.4 2.3 1.9 3.5 10.2 -4.9 58.1 49.2 3.1

1. Contributions to changes in real GDP, actual amount in the first column.

2. Consumer price index excluding food and energy.

Source: OECD Economic Outlook 109 database.

StatLink 2 https://stat.link/83vf2l

A further tightening of containment measures undermined the economic recovery In early 2021, the Czech economy was still strongly affected by the ongoing pandemic, halting the pick-up in activity that had started in the third quarter of 2020. Services continued to be severely restricted.

Manufacturing, which had fully recovered by the end of 2020, also faced headwinds due to slower growth in trading partners and supply-side constraints. Business sentiment and consumer confidence remained below pre-crisis levels. The unemployment rate rose but remained very low at 3.3%, reflecting pre-crisis labour market tightness as well as government support measures. After falling for roughly half a year, inflation edged up in spring 2021, due to rising oil prices. In April, it rose to 3.1% − beyond the upper bound of the 1-3% target range.

Policy remains very accommodative In 2020, the government introduced a generous package of emergency support measures, including job retention schemes, income support to the self-employed and parents that had to stay at home, as well as loan and guarantee programmes to boost firm liquidity. Many of these measures have been extended into 2021, and fiscal policy continues to be highly expansionary. Additional schemes have been introduced to target the most affected firms and sectors, including in tourism, restaurants, sports and culture. Loans and guarantees have been provided to support investment. In January 2021, a tax stimulus package took effect, aimed at boosting consumption and investment growth. The measures cut personal income taxes and OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021

 41 introduced an accelerated amortisation of fixed assets acquired in 2020 and 2021. Monetary and financial policies remained accommodative, with the policy interest rate at 0.25% and the countercyclical capital buffer at 0.5%.

Sustained economic recovery should start in mid-2021 The economy is projected to start recovering in the summer of 2021, once vaccination has advanced and containment measures are relaxed. Household consumption and investment will bounce back as uncertainty recedes and sentiment improves. Meanwhile, stronger foreign demand will boost exports.

Unemployment will decline only gradually due to the removal of policy accommodation and an expected rise in bankruptcies. Inflation will hover between 2 and 3%, pushed up by higher fuel and food prices.

Uncertainty nevertheless remains high. The manufacturing sector could be further affected by distortions to global supply chains in the event of new pandemic waves. On the upside, the current substantial government support could have a stronger positive impact and households may reduce their currently high saving more quickly than assumed.

Policy should facilitate job transition and boost a green recovery Monetary policy has been appropriately accommodative. However, once the recovery is well underway, a gradual normalisation of interest rates should be considered. Macroprudential tools and the normal counter-cyclical capital buffer should be reinstated to counter risks in the housing market and help restore adequate buffers. On the fiscal side, a 0.5 percentage point of GDP consolidation (in structural terms annually) is planned from 2022 onwards, which is appropriate if there are no further setbacks. Active labour market policies and reskilling programmes should be boosted and insolvency procedures accelerated to facilitate resource reallocation. Bringing inactive people to work, including mothers with young children, could also help growth. Investment support to strengthen the recovery is an opportunity to green the economy and boost R&D and innovation activity, as reflected in the National Reform Programme.

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021