The Czech Republic as opposed to an easy ride on the horizon, as growth is expected to moderate to 2.6% by 2027. This positive expansion is expected to succeed in the coming year, driven by an improving industry and growing fixed investments. Challenges lie ahead, notably with the imminent introduction of emissions allowances for households and small and medium-sized enterprises — ETS2. This new development further complicates the economic outlook, as its effects are expected to be first-order drivers of overall inflation.
In 2027, the Czech economy will not reach its full potential, as various factors including ETS2 will shape its trajectory. Unfortunately, these costly emission allowances will outweigh the positive effects on consumer inflation by $900 billion. In fact, they’re projected to contribute about 1.2 percentage points to the total annual inflation rate. Today, only a third of this impact appears in the baseline macroeconomic forecast. If so, that means all of the recent economic forecasts for the future could be vastly underestimating those gains.
Economic Recovery and Investment Trends
Despite this darkening outlook, many analysts predict a rebound path, at least in the short term, for the Czech economy. Fixed investment will bounce back, increasing by 4.4% next year. This is a sharp reversal from the 3.1% drop seen in 2023. This year’s growth has been lifted by 0.5% from the new upturn in fixed investment. This trend is a very encouraging indicator of where business sentiment is heading.
This turnaround in business fixed investment is probably closely related to rising levels of business confidence. Third, business confidence remains high for the third month in a row – now more than three months running above its long-term average – and the business confidence indicator for October grew by 1.8 points to 103.4. This month-over-month steady increase is a positive sign that businesses are feeling optimistic about future business conditions, which can lead to more investments.
Consumer confidence has made a notable comeback, too. The consumer confidence indicator rose by 3.9 points to take it up to 107.4 in October. This rise reflects a growing sense of optimism among consumers regarding their economic circumstances, potentially translating into increased spending and stimulating further economic activity.
Inflation Concerns and Economic Projections
As the Czech economy starts to recover, fears of inflation are still strong. Despite cost increases resulting from its introduction, we’re still left with ETS2’s likely widely disparate indirect impacts on consumer prices. According to specialists, the complete impacts of these emission allowances will not be immediately shown in economic analyses. This lag might help explain why inflation predictions can be off the mark so badly.
The 1.2 percentage point increase in total annual inflation that ETS2 is expected to cause in overall inflation is worth examining further. What will this mean for consumer behavior and business operations. Higher inflation would slow consumer spending if wages are unable to match inflation with productivity in the short term, possibly tipping the economy into recession.
Only marginally, as the Czech economy’s record high growth is on course to come in slightly above trend. This year, it’s at 2.5%, but will increase to 2.7% by 2026. This forward-looking projection is a tribute to the strength and potential of the sustained economic momentum. Outside forces such as global market conditions and potential shifts in domestic policy continue to cast a shadow of uncertainty.