Macro: COVID-19 Update Czech Republic: Czech economy already in the red in Q1

In contrast to some regional peers, the coronavirus sent already Q1 GDP in Czechia to negative territory (-2.2% yoy). Weak foreign demand contributed to the economic downturn as well as weak capital formation. On the contrary, higher government spending contributed positively and hampered the economic downturn.
The degree of uncertainty about future development remains enormous: economic activity should gradually be renewed in May. However, a deep GDP contraction in Q2 is expected (~15% yoy). Overall, for 2020 we expect a GDP decline of about 7.6%. In 2021, GDP growth should jump to 6-7%. Overall, the return to the pre-crisis levels should be a lengthy process.
The number of unemployed should more than double by the end of this year meaning an unemployment rate at around 6.6%. Consequently, nominal wage dynamics should also slow rapidly.
Following 200 bp cumulative rate cuts in recent times, we assume that the cutting cycle ends at the current key rate level of 0.25%. Should the situation deteriorate anew, the CNB should first use some further regulatory relaxation / macroprudential measures.
The Czech government has promised fiscal stimulus in the volume of 20.7% of GDP. We have a more pessimistic budget deficit target than the government for this year and expect it to only decrease slowly in the following years. This will push the debt of the Czech public sector above 40% of GDP in 2022.

This Research was produced and first published by Raiffeisen Bank International AG which is supervised by the Austrian Financial Market Authority and the National Bank of Austria.