Consumer and business confidence in Czechia rose in May, driven by easing inflation and strong real wage growth, according to the latest report by ING's Chief Economist for the Czech Republic, David Havrlant. However, a sluggish industrial sector and flat investment levels remain significant concerns for the country's broader economic outlook.
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The business confidence indicator climbed 4.5 points from April to 101.0, while the consumer confidence index rose 3.0 points to 100.7 – surpassing its long-term average for the first time in six months. 'The improvement in industrial sentiment is welcome, with the caveat that the index value of 94.2 remains well below its long-term average,' said Havrlant.
The upbeat consumer sentiment is largely attributed to subdued inflation and the strength of the labour market. Households are benefiting from improved purchasing power and are increasingly channelling their savings into the flourishing property market. 'Consumers' improved assessment seems justified – the fundamental driver of solid real wage growth on the back of tamed inflation and a robust labour market provides further firepower for spending,' the report noted.
Business sentiment in industry and selected service sectors improved, gaining 3.9 and 6.6 points respectively. However, it fell in trade and construction, highlighting persistent uncertainty in these areas. 'The continued weakness in manufacturing is outweighed by the upbeat mood in the construction and service sectors,' ING reported.
Headline inflation is forecast to average 2.4% in 2025, down from a previous high estimate of 2.7%, supported by lower Brent crude oil prices and April's softer-than-expected figure of 1.8% year-on-year. Core inflation is also projected slightly lower at 2.5%, suggesting manageable domestic price pressures going forward.
'Domestic price risks have not fully receded but are softer than as assessed a few months before,' said Havrlant. He highlighted that risks remain concentrated in imputed rents linked to the property boom and in some segments of the service sector. Meanwhile, imported inflation risks have diminished thanks to declining global energy prices, a stronger koruna, and weak EU growth.
Despite the positive sentiment trends, the Czech economy continues to grapple with stagnating fixed investment and a manufacturing sector that has yet to fully recover. 'Czech fixed investment has remained flat over the past three years and industry has possibly not hit bottom,' Havrlant warned, describing this as a key issue for the Czech National Bank (CNB) in the coming months.
Real interest rates remain firmly in positive territory, even amid potential future rate cuts, underscoring the CNB's cautious approach. 'Even with another rate reduction, Czech real interest rates are set to remain comfortably positive… the monetary policy stance will, in any case, remain rather restrictive,' the report stated.
Looking ahead, Havrlant outlined a baseline scenario for a further interest rate cut in August. However, he cautioned against complacency, pointing to Europe's unresolved structural issues. 'If things do not turn for the better in Europe by addressing the critical structural growth hurdles, then there will likely be even more space for rate reductions, even in Czechia.'
In closing, Havrlant offered a sobering metaphor for the precarious balance of current momentum: 'It is like riding a bicycle: you go downhill, and everything is speedy and brisk – then the hill comes and it all changes at once. If you don't start pedalling enthusiastically, you lose momentum and ultimately fall off.'
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