The Czech Republic is on the verge of a recession

The domestic economy grew by 1.6 percent year-on-year in the third quarter of this year. In contrast, gross domestic product (GDP) fell by 0.4 percent compared to the previous quarter. This is according to the preliminary estimate of the Czech Statistical Office (CSO). Economists say the Czech Republic is entering a recession.

For example, it is unclear what impact this will have on employment. It depends on whether the slump will last longer and how deep it will be.

“The quarter-on-quarter decline was caused by lower domestic demand, especially lower household final consumption expenditure,” Vladimír Kermiet of the Czech Statistical Office said on Tuesday.

The central bank also played a role

Of the sectors, trade, transportation, accommodation, and hospitality were the worst performers in the quarter-on-quarter comparison. Construction also declined, while industry rose slightly. “The data confirm the assumptions about the inevitability of an economic recession in the Czech Republic.

The observed cooling of domestic demand results from a decline in real incomes, which are eaten up by inflation and freezing economic sentiment. There is no reason to expect a significant recovery here, even in the coming months,” commented Cyrrus economist Vít Hradil.

According to Akcenta analyst Miroslav Novak, a quarter-on-quarter decline can also be expected in Q4. According to him, the exceptionally high inflation and the energy crisis are already hurting the economy’s performance, which can be seen in weak household consumption.

According to UniCredit Bank economist Pavel Sobíšek, the Czech National Bank’s interest rate hikes, which affect household consumption behavior, contributed to the cooling. The CNB started taming rising inflation by raising rates a year ago.

“The fact that the performance of the Czech economy has declined earlier than in most EU countries is probably no coincidence,” Sobíšek said. “Given that interest rates in the Czech Republic seem to have already reached the ceiling, unlike in the eurozone, this nevertheless gives the Czech economy a chance for an early recovery next year,” he added.

Germany is also teetering on the brink of recession, although it maintained a modest 0.3 percent growth in the third quarter, despite analysts’ expectations. How severe the recession in the Czech Republic will remain a question, as it depends on several external influences, not only on developments in Germany, to which the Czech economy is intrinsically linked.

“On the positive side, unemployment is not rising, and given the relatively positive development of energy prices in recent weeks and the filling of gas reservoirs, I do not expect a significant recession in the Czech Republic,” says PwC partner Petr Kříž.

Analysts agree that GDP growth of around 2.5 percent can be expected for the entire year but point to the low comparative base of 2021 with the impact of the pandemic on the economy. Experts expect only weak growth next year.