News

Brexit delaying exit

It’s official: the UK will be leaving the European Union. Our previous Czech Economic Outlook analysed Brexit as a risk scenario. And the UK vote came as a shock to the financial markets, but they got over it in a few weeks. What will the macroeconomic impacts be? Well, analysts have already started releasing downward revisions to growth outlooks, and the first were to UK economic growth. Euro area 2017 outlooks have been revised only slightly, and the same is true for our 2017 Czech macroeconomic forecast.

Our CFO and, we expect, many of his colleagues in other companies are spending the summer tackling the tall order of 2017 budgeting. In this edition of the Czech Economic Outlook we focus on what they can factor in their plans via a detailed macroeconomic forecast for next year. The good news is that we don’t expect any major twists and turns in macroeconomic developments. The economy may grow a bit faster next year than this year thanks to the gradual resolution of the problems which have prompted this year’s shortfall in investments financed from the public purse. This implies a rebound in economic activity. Household consumption, the second component of internal demand, will also develop favourably, as the continuing rise of employment and wage growth boost consumer appetite. 

Brexit’s most visible impact on the Czech economy will be a later exit by the CNB from the FX commitment regime. The end-2017 timing reflects our inflation outlook. Consumer price dynamics were unexpectedly weak in the first half of this year, mainly due to cheap fuel and food, with the latter coming as a big surprise. We therefore analyse these items in more detail in special boxes. And the outcome? Going forward, we expect no dramatic price hikes in these groups. 

In conclusion, although the 2017 forecast basically follows on from this year’s trends, the risks must be highlighted. They primarily can be found in greater political uncertainty. In the Czech Republic, this uncertainty is attributable to the start of the next round of the political cycle: regional and Senate elections will be held as early as this autumn, 2017 will see general elections, and early-2018 will be marked by the presidential election. Major political changes can also be expected in the key European countries: we are facing a referendum in Italy while the new Spanish cabinet is still nowhere to be seen. The general elections in Germany and the presidential elections in France will hot up the situation even further next year. Thus, the current geopolitical situation could change profoundly. It will not be easy for companies to make investment decisions.