The Czech economy is confronting rising headwinds as weak industrial pricing, global trade tensions, and subdued investment appetite threaten to erode profitability and slow economic momentum, according to a new report by ING.
In March, industrial producer prices in the Czech Republic fell by 0.3% both month-on-month and year-on-year, defying market expectations. The decline indicates 'fierce price competition, with demand struggling to recover,' said David Havrlant, Chief Economist for the Czech Republic at ING. He warned that this soft pricing 'is likely to squeeze profit margins and complicate the process of maintaining strong wage increases.'
Despite a relatively tight labour market, Havrlant noted that 'as uncertainty grows, the challenge of negotiating wage hikes will intensify for both employees and employers.'
While industrial prices stagnated, agricultural producer prices maintained upward momentum, rising 2.2% month-on-month and 8.2% year-on-year. The growth was driven particularly by animal production, which surged 12.7% annually. 'Prices in agricultural production suggest that there is still quite some potential for the final consumer price tags to be lifted in the coming months despite a slowdown in the annual pace,' Havrlant explained.
However, falling Brent crude and natural gas prices are expected to curb the upward pressure on food prices due to declining transport and fertiliser costs. Even so, Havrlant cautioned that food prices "tend to be sticky," and the 'level of competition in the food retail segment, which is not groundbreaking in the Czech Republic,' may delay the pass-through of reduced costs to consumers.
Trade tensions have also cast a shadow over the Czech Republic's growth outlook. ING's revised forecast lowers Czech GDP growth to 2.1% for 2025 (down 0.3 percentage points) and to 2.6% for 2026 (down 0.1pp), citing the knock-on effects of the global trade war, particularly from the US. 'We see a direct adverse effect of up to 0.2pp of GDP and an indirect impact via confidence channels of another 0.2pp,' said Havrlant.
The industrial sector, in particular, remains vulnerable. 'Redundant Chinese production will likely find its way to Europe, often at dumping prices. Such a situation represents a significant risk to the Czech industrial base,' he noted. He also warned that potential free trade agreements, such as one between the EU and UAE, could open the door to lower-cost imports, intensifying the strain on local manufacturers.
With fixed investment dropping 2.4% quarter-on-quarter at the end of 2024 and remaining flat for over two years, the Czech National Bank (CNB) is widely expected to cut interest rates in May and August. 'Subdued energy prices and increased uncertainty surrounding the global economic expansion pave the way to proceed with the expected rate reductions,' Havrlant stated.
Finally, ING revised its inflation forecast slightly downward to 2.6% for 2025, largely due to a sharper-than-expected decline in fuel prices and currency gains that have made imports cheaper. Core inflation remains steady, as lower energy bills are expected to ease household budget constraints and support consumer spending.
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