Czech confidence points to sub-par expansion
The desk interprets the commentary from ing-think as a signal of ongoing economic sluggishness in the Czech Republic, with confidence indicators pointing to subdued growth over the upcoming quarters. Per the full note, while consumer confidence rose modestly to 105.1 in September, business confidence declined significantly, indicating persistent headwinds to economic activity from external factors such as geopolitical tensions and rising energy prices. This backdrop suggests muted consumer spending and likely inflationary pressures that could undermine wage gains. Given the JPY movements and its historical correlation with economic fundamentals, traders should closely monitor these dynamics.
What the desk is arguing
The Czech economy appears poised for continued lackluster growth, as confidence indicators reveal diverging trends in consumer and business sentiment. Per the full note from ing-think, consumer confidence increased by 2.8 points, but this is viewed as a rebound rather than a sustainable improvement given deteriorating trends since late 2022. On the other hand, business confidence fell by 1.8 points to 98.4, suggesting that a significant decline in sentiment is looming, particularly within the industrial and services sectors.
This divergence in confidence reflects deeper economic concerns, including saturation within services and diminishing industrial activity, as underscored by the report’s insights into the impact of pre-stocking behaviors in anticipation of geopolitical tensions. Given that both consumer and business confidence remain below strong performance levels, the outlook points to an overall continued underperformance in economic expansion.
Where it sits in our coverage
Czech foreign exchange expectations from the desk align with a consensus target of 1.075 for the EUR/CZK pair, with a range between 1.04 and 1.12 indicated by recent forecasts. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This stance reflects a consensus leaning towards a softer economic trajectory, diverging somewhat from more optimistic views among some firms, positioning us slightly below the upper end of expected ranges.
How other firms see it
Sentiment is split among firms, with jpmorgan and bofa expressing contrasting views on the Czech economy's potential. Aligned firms expect modest growth constraints, whereas contrary firms anticipate stronger rebound trajectories. Watch for developments in the EUR/CZK pair as it may be sensitive to economic news coming from Europe and trends in central bank policy, particularly regarding the Czech National Bank’s interest rate decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Consumer and business confidence trends diverge sharply, indicating economic headwinds.
- 02Inflation pressures are expected to mitigate real wage gains, affecting consumer spending.
- 03The outlook for the Czech economy suggests potential stagnation in growth.
- 04The EUR/CZK pair may reflect these dynamics closely in upcoming sessions.
Market implications
Traders should closely monitor the EUR/CZK levels, particularly around the 1.075 consensus target, as indicators suggest persistent sluggishness. Any deviations in consumer or business confidence metrics could create volatility in this pair, impacting positions.
Risks to this view
The primary risk to this outlook would be a sudden improvement in consumer or business confidence metrics, against a backdrop of better-than-expected economic data from the Czech Republic or a decline in energy prices alleviating inflation pressures significantly. Such scenarios could force a reassessment of growth forecasts.
Articles Czech confidence points to sub-par expansion Published 14:32 Czech Republic Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download We read the confidence indicators as pointing to a rather mediocre economic expansion in the coming quarters, with the Hormuz conflict and high energy prices taking their toll. Meanwhile, inflation is set to rise at the turn of the year, eating into real wage gains and potentially household spending, too David Havrlant Czech consumer confidence rose in September while business confidence fell Confidence far from signalling better times ahead Czech consumer confidence edged higher in September, while business confidence moved in the opposite direction. Both developments are in line with our expectations, only much more pronounced.
The consumer confidence indicator rose by 2.8 points to 105.1 in September, stronger than market participants had expected. Nevertheless, we view this increase as a correction following the previous pronounced decline, at least to some extent, and do not perceive it as a decisive turnaround in the deteriorating trend observed since last November. Meanwhile, the business confidence indicator fell 1.8 points to 98.4, coming in below expectations and the long-term average, with services and industry recording the largest declines.
Industry and services took business confidence down Source: CZSO, Macrobond "> Source: CZSO, Macrobond This suggests that two of our hypotheses may just be coming true: i) the services sector is becoming saturated, and ii) industrial performance and confidence were propped up by Hormuz-induced pre-stocking that is just beginning to fade. It should be noted that neither consumer nor business confidence is at levels consistent with strong economic performance, such as in the period just before the pandemic, when the economy was expanding at around 3%. Stronger inflation will reduce real wage gains Looking ahead, we expect firms’ profitability to come under pressure due to increasing input costs combined with severe global (predominantly Chinese) competition.
With this in mind, we don’t see the private sector as being willing or able to sustain generous wage increases throughout the coming year. Nominal wage growth is expected to remain relatively solid at around 6% over the next year. However, when it comes to household budgets, part of the nominal income gain will be eroded by faster price growth, particularly for essential items such as food and energy.
Ergo, we expect the economy to deliver below-par growth alongside above-par inflation over the coming year. Real wage gains to soften in 2027 Source: CZSO, ING, Macrobond "> Source: CZSO, ING, Macrobond We don’t foresee any collapse in household spending at this stage, however, real wage growth is set to soften to 2.6% next year in our base case scenario from the more than 4% rate observed since 2024. Sure, this is still not too bad for the economy en gros, but for medium- and low-income households, the situation may get tricky.
With that in mind, we expect slightly softer household consumption over the coming quarters, taking the 2027 average growth pace to 1.9%. At the same time, industry has recently regained its footing, with exporters set to benefit from a weaker koruna both now and in the future. We see the composition of growth shifting from strong household consumption and mediocre manufacturing performance towards somewhat weaker consumer spending and stronger industrial output.
Less buoyant consumer expenditure ahead Source: CZSO, ING, Macrobond "> Source: CZSO, ING, Macrobond Under this scenario, the economy is set to grow by just under 2% this year and gradually accelerate thereafter. That said, the recent re-escalation of the conflict in the Middle East, together with Brent crude prices rising above USD100/bbl, poses a clear risk to this outlook. Higher energy and material prices, and increased uncertainty, make the situation more complicated for businesses, while the weaker koruna will make imports more expensive, which may hit household budgets.
Inflation on the rise And still, inflation is set to increase at the turn of the year. This reflects the textbook impact of a negative supply shock, where lower output is accompanied by higher prices. When it comes to the inflation outlook, we have taken on board the government measures to mitigate the surge in fuel prices, effective from October.
We make the assumption that the cap on margins at fuel stations and the reduced excise duty on diesel will be implemented for six months, i.e., up until March next year. With Brent crude prices expected to decline to USD85/bbl by that time, it would be a good time to allow the measures to expire. Assuming conditions return to normal over the next two months, fuel prices are likely to receive a boost in April and May next year.
So, the inflation profile has changed, namely the peak in February has shifted downwards a little to 4%, while the yearly average remains unchanged at 3.3%. Core inflation, which has become a key focus for policymakers, is set to average 2.9% next year, peaking at 3.6% in January. Punchy inflation outlook Source: CNB, ING, Macrobond "> Source: CNB, ING, Macrobond The major risk to the forecast remains the same: uncertainty around January’s adjustment of regulated prices.
We should obtain more information on distributors' pricing plans throughout November, which should help to reduce the current information vacuum. Nevertheless, suppliers have little incentive to announce price increases too early, as doing so could encourage customers to switch providers. And this creates an additional silent risk for forecasters, as increases in electricity and natural gas prices, as well as surges in water and heating charges, may be announced at a very late stage or be done in smaller steps.
Anyway, the first swallows have arrived, and some household energy price increases are due in September. As King Théoden says just before the battle has started: "So it begins". Real interest rates will come under pressure Source: CNB, ING, Macrobond "> Source: CNB, ING, Macrobond Meanwhile, I see upward risks for food prices.
Higher costs for energy, fertilisers and transportation, along with below-average crop yields in Europe and ongoing difficulties in exporting Ukrainian grain (due to low water levels on the Danube and the blockade of the port of Odesa) could prove a toxic combination. For now, we stick to our view on policy rates and the Czech National Bank's likely course of action, assigning a 60% probability to a rate hike in November and 40% probability to rates remaining unchanged, with any increase likely to be a one-off fine-tuning move. It is a close call, as real interest rates are set to remain broadly positive, despite drifting close to the zero-bound in the first half of next year.
The above-mentioned probabilities will evolve in response to CNB communication, news on regulated prices, Brent crude prices, and foreign exchange developments. Wage growth Real wage Real GDP Interest rate Inflation Forecast Czechia Consumer confidence CNB Business confidence Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author David Havrlant Chief Economist, Czech Republic David joined ING in 2024 as Chief Economist for the Czech Republic. He gained professional experience at the Czech National Bank and international institutions such as the ECB, the EC,… In this article Confidence far from signalling better times ahead Stronger inflation will reduce real wage gains Inflation on the rise
Sources & References
How we cover this story