ING’s latest economic and financial analysis on the economic costs of Covid-19 predicts the Czech Republic will show negative GDP for full-year 2020. The volatility of the Czech crown will remain “extra elevated”, it says, given the positioning-related moves in the currency and the risk of central bank interventions.
ING has collectively downgraded the 2020 GDP outlook for the whole of Central and Eastern Europe (CEE) on the back of coronavirus fears. The effects of falling foreign demand and supply chain disruptions may peak in the second quarter, when it comes to GDP levels, the bank says.
According to ING chief economist, Czech Republic:
“Second-round effects in production, limited business and household spending will drag down both investment and consumption. When fear decreases in the second half of the year, we see on average 60 percent recovery of cumulated GDP drops from the first half of 2020. Nonetheless, both the Czech Republic and Romania should show negative GDP for full 2020.”
Below is a summary of ING’s main predictions for the Czech Republic
• Growth: The Czech economy falling into recession has become our baseline scenario as Covid-19 measures not only affect domestic but also foreign demand significantly. The Czech economy itself could cope with domestic restrictive measures due to sufficient fiscal space (4th lowest total debt-to-GDP in the EU – around 32% of GDP). However, foreign demand might become a bottleneck for a quick recovery in 2H20 though it is too early to estimate the full effect.
• Inflation: While a few weeks back inflation was pencilled in go above 3% this year, the significant decline in oil prices brought a turnaround, subtracting broadly 0.6 percentage points from YoY inflation this year. We will very likely see disinflation pressures due to the weakening economy, though weaker CZK and some supply constraints go in the opposite direction. All in all, we expect headline CPI to decelerate towards 2.5% this year.
• ČNB: The Czech National Bank (ČNB) delivered a 50bp emergency rate on Monday (15 March) and is very likely to continue lowering borrowing costs to mitigate the coronavirus shock. This means that the main 2-week repo rate is likely to fall significantly in the forthcoming months (towards 0.50%) with the CNB likely delivering rate cuts (25bp or more) in each of the three forthcoming monetary meetings (with a non-negligible risk of another emergency rate cut or a cut being larger than 50bp). This scenario is to a large extent priced in by the market.
• EUR/CZK: The upcoming rate cuts (which will take away the yield advantage – the main koruna anchor) and challenging global environment for EM FX will keep the still overbought CZK under pressure. Due to the risk of a disorderly sell-off, we expect the CNB to start one-off FX intervention to smooth the koruna volatility. We expect the first interventions to come around the EUR/CZK 28.00 level. Yet this will not be a firm ceiling on EUR/CZK, with FX interventions having a smoothing rather than firming function. This means the EUR/CZK could trade meaningfully above 28.00 should global risk assets remain under pressure.
• Fiscal policy: The government introduced a set of preliminary measures to mitigate short-term negative effects, like tax delays, or providing no interest/fee 2-year loans for the affected SME with a one-year delay in payments. Other measures are in the pipeline (i.e., helping employment by providing full or partial compensation of wages to companies affected by quarantine). More fiscal measures are likely to come. Given the fiscal space available in the Czech economy, more fiscal measures are necessary to counteract adverse developments and support subsequent recovery.
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