COVID and Economic Update Czech Republic: Back to square one, recovery postponed amid second lockdown

Coronavirus: While the Czech Republic was handling the first wave of the pandemic quite well, it has quickly become one of the most affected countries at the beginning of autumn. Hence, the Czech government declared a 30-day state of emergency on October 5th. As the situation improved, the strictest measures (e.g. closing of shops) have been lifted in the first week of December. However, the state of emergency has been preserved creating room for a prompt policy reaction should the epidemiological situation deteriorate. Growth Outlook: After the unprecedented decline in Q2 (-8.5% qoq and -10.7% yoy) the Czech economy managed to get back on track quickly. According to the refined estimate, GDP grew by 6.9% qoq in Q3, up from the initially estimated 6.2%. However, it is obvious that with the onset of the second wave of COVID-19 the economic recovery was only temporary and another decline in Q4 is ahead. Nevertheless, the contraction will be smaller compared to Q2 as the nature of the second round of lockdowns is different. For 2021, we are cautious about the strength of the recovery as the negative effects of the pandemic will still weigh on the economy in the first quarter of 2021. In addition, one can expect medium-term pandemic-induced negative consequences, such as rising unemployment. Fiscal outlook: Czech consumer price dynamics remains rather high, having recently just barely dropped below 3%, and thus returned to the central banks tolerance band. The recent trend of slowing inflation should continue further as a result of cooling demand. On the other hand, the previously swift wage growth and recent depreciation of the Koruna work in the opposite direction. Inflation/Monetary policy: The previously comfortable fiscal position of the Czech Republic, given by both a relatively successful handling of the first pandemic wave and low public indebtedness, has recently worsened somewhat. While other countries have already started making plans for a post-pandemic normalization of public deficits, the Czech government has announced its plans for the continuation of generous spending schemes well into upcoming years.