Economic Analysis - Investment Rebounding, Households Driving Economy - MAY 2017

BMI View: Economic growth in the Czech Republic will accelerate in 2017 and 2018, after a sharp contraction of construction activity saw headline growth decelerat ed to just 2.3% in 2016 . Domestic consumption will remain the biggest contributor to economic activity in the quarters ahead, while gross fixed capital formation will rebound , on the back of high confidence indicator and strong demand.

Following a deceleration of real GDP growth to an estimated 2.3% in 2016, we remain relatively upbeat on growth prospects and forecast growth to accelerate to 2.6% in 2017 and 2.5% in 2018, comfortably outpacing eurozone averages. Growth tailed off significantly in 2016 from 4.2% in 2015, on account of subdued structural fund inflows from the European Union (EU), resulting in a sharp contraction of real construction. Looking forward we expect fixed investment growth to rebound in 2017 due to base effects, recovering EU fund inflows, strong business confidence, low borrowing costs, and generally strong demand conditions. Furthermore, a tight labour market and strong wage growth will continue to result in Czech firms investing in more capital intensive economy, providing fixed investment growth with further tailwinds. Domestic consumption will be the other major pillar of the economy, with household spending doing the heavy lifting. In addition, higher government expenditure ahead of the parliamentary elections in September 2017 will provide further tailwinds.

Robust leading and coincident indicators point towards improving economic conditions, across the board, underpinning our view that GDP growth will accelerate. The European Commission Economic Sentiment index for the Czech Republic hit a multi-year high in January, suggesting that businesses and consumers retain a positive outlook on economic growth prospects for the coming six months. Industrial capacity utilisation is high at nearly 85%, which suggests manufacturers will start to expand production facilities in order to cope with future demand. In addition, we expect manufacturers to increasingly transition towards more a capital intensive production, on account of strong wage growth and low borrowing costs, providing fixed investment growth with further tailwinds ( see ' CEE: Labour Shortages Imperil Growth Outlook ' November 3 2016).

Investment THe Largest Drag On Growth
Czech Republic - Real GDP Growth & Expendiure Components, % chg y-o-y
Source: Eurostat, BMI

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