The economy performed better than expected in 4Q, mainly due to a very good performance from industry. This was reflected in a record foreign trade surplus, and net exports were therefore the main source of quarter-on-quarter GDP growth, contributing 1pp. Higher government spending contributed in a similarly positive manner. On the other hand, household consumption fell by 4% qoq despite the re-opening of shops before Christmas. Investment remained subdued due to elevated uncertainty and so continued to decline, by 12.3% yoy, with the qoq decrease at 0.3%. The year-on-year decline in gross value added in manufacturing eased from 4.6% to 1.1% and is already within reach of pre-crisis levels. In services and trade, the lockdown continued to depress economic activity, and value added fell by 3.3% yoy and 14.7% yoy, respectively.

The deviation (by +1.6pp) of actual yoy GDP growth in 4Q from our forecast was mainly due to higher government consumption and net exports, while fixed investment was only slightly higher. On the other hand, year-on-year growth in household consumption was 0.7pp lower than in our forecast, as the impact of the December easing of virus-related measures was probably weaker than we had expected.

The beginning of 2021 saw continuing pandemic-related restrictions, but the spread of the virus nonetheless re-accelerated. This has led to a further tightening of measures from the beginning of this week. In 1Q21, the Czech economy is thus likely to decline. Services and retail remain closed, and problems with the supply of production inputs in industry are likely to be compounded by increased labour shortages due to a plan to increase testing of employees and the complete closure of schools and kindergartens. In addition, industrial production in 4Q was boosted by frontloading linked to the end of the post-Brexit transition period and new emission standards in the automotive industry. While these factors contributed to higher economic growth in 4Q, they are expected to have the opposite effect in 1Q.

Economic developments will mainly depend on successful vaccination. However, this process is now only just under way, and given the planned supply of vaccines, we will probably not see a significant economic recovery until 2H. For full-year 2021, we expect Czech GDP to grow by 2.6%. We see the risks to the downside given uncertainty around the pandemic.

The biggest risk is the possibly a complete closure of industry, which would likely lead to a significant deterioration in the economic outlook and public finances. The main problem is that should industry continue to operate in other countries, an interruption in the supply of inputs from Czech producers could see the latter replaced by producers from other countries. This would have long-lasting effects on the Czech manufacturing sector and would significantly weaken the economy’s ability to quickly recover.

Regards,

Martin Gürtler

Economic and Strategy Research

Komerční banka

trading.kb.cz