Economic recovery expected to continue at a slow pace

Czechia’s public finances have deteriorated in recent years but will remain manageable over the next two years. The Czech government posted large annual fiscal deficits of more than -5% of GDP in 2020-2021 as a result of a huge fiscal stimulus program in order to mitigate the impact of the Covid-19 crisis on the economy. The annual shortfalls narrowed but remained large in 2022-2023, around -3.5% of GDP on average, as the government implemented new fiscal support measures to mitigate the impact of the energy crisis and the economic downturn on households and industry. Meanwhile, the government has decided to embark on a fiscal-consolidation program from 2024 onwards. Hence, we forecast annual fiscal deficits of less than -3% of GDP in the next years. Financing these deficits will be manageable even though yields on Eurobonds have increased over the past years. Moreover, the government is eligible for substantial EU funding and can also access local markets. As a result of several years of elevated fiscal deficits, total public debt rose from a low of 30% of GDP in 2019 to around 45% currently. It is forecast to remain around that ratio in the next few years, still fairly low compared to peers.

Czechia’s external position has rebalanced after a significant deterioration in 2022 triggered by rapidly increasing energy import costs since H2 2021. After seven successive years of surpluses, the current account balance moved into a deficit of -2.7% of GDP in 2021, which widened to -4.7% in 2022. However, the external shortfall returned to a small surplus of +0.4% of GDP in 2023, mainly as a result of the partial correction of the earlier increase in energy prices and the curtailing effect of faltering domestic demand on imports. We forecast a continued moderate current account surplus in 2025 as both exports and imports will recover only modestly. On another positive note, net foreign direct investment (FDI) inflows have recovered from modest levels in 2021-2022 and net portfolio outflows have been smaller since June 2023 (on a rolling 12-month basis), after two years of significant net outflows. Altogether, this rebalancing also helped to halt the downtrend in the CNB’s foreign exchange (FX) reserves, which had dropped from a peak of EUR160bn in April 2022 to a temporary low of EUR126bn a year later. Reserves still covered a comfortable seven months of imports as of mid-2024, but that rate is down from a peak of 12 months in early 2020. In other terms, reserves cover all external debt payments falling due in the next 12 months. In short, Czechia’s external finances are still adequate and appear to regain some of the strength which they had lost in 2021-2022.