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Although most people are currently dealing with their summer vacation, which they really want to enjoy after two years of the covid pandemic and travel tied up by various restrictions, in the fall there will be an economic hangover in the form of a recession. Strong indications are coming from the Czech Republic and abroad. Economic experts take the coming of a recession more or less as a fact, the considerations are more about how long and deep it will be.
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A really serious warning came last week from Germany, where after more than 30 years the foreign trade balance of the strongest European economy went into the red. The export capacity of the European Union as a whole is also weakening.
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According to former CNB Governor and Chief Economist of CEE Generali Holding Miroslav Singer, the cost pressures on the EU economy will have the most permanent character among all major global economies. European companies, including domestic ones, will be compared to companies from Asia and the USA lose competitiveness when exporting their products.
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The cause is still disrupted supply-customer chains and a sharp increase in energy prices. He has not yet shown himself in full force. According to Fatih Birol, director of the International Energy Agency, “the world has never experienced such a major energy crisis in terms of its depth and complexity, and we may not have seen the worst part of it yet.” Birol added that the coming winter will be very difficult in Europe and may have serious consequences for the world economy.
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The cooling of the economy will come as a result of weakening competitiveness and the need to fight record high inflation. Until recently, there were discussions as to whether this is a temporary phenomenon that will gradually fade away, but this opinion is not currently held by any judicial politician or monetary authority. As Miroslav Singer mentions, the fight against inflation will not be a short process and it will require a further reduction in the standard of living of citizens of EU countries.
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And the lowering of living standards is already running at full speed in the Czech Republic. High inflation has already taken away from the value of savings of Czech households in a year-on-year comparison of roughly 500 billion crowns, and it can be felt in the cooling of household consumption. The latest data on the development of retail sales showed that Czechs are starting to step on the brakes and price growth is reaching levels that people no longer accept. Retail sales in the Czech Republic fell in May year-on-year comparison, the most in the EU by almost 7 percent, while the average in the EU was still a weak growth of 0.8 percent.
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The cooling as a result of rising costs and the tightening monetary policy of the CNB can also be seen in the record-growing investments in own housing in previous years. In the first half of this year, the volume of granted mortgages fell by half year-on-year, but real estate prices are still resisting the cooling of demand. Last year, the prices of apartments and houses in the Czech Republic rose the most in the entire EU, but according to players on the real estate market, there is already a noticeable slowdown in prices this year, and many already admit that prices may start to fall in the future.
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What is unique about the situation in the Czech Republic is the unemployment rate. It has even fallen slightly at the moment, making it one of the lowest in the EU. Companies are well aware of how difficult it is to find new employees, which was especially felt by entrepreneurs in the gastronomy sector, who are unable to find a good replacement for the people they got rid of during the pandemic. Companies often keep their employees even at the cost of increasing losses, but the question is how long they will be able to afford it.
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In addition, more than three fifths of enterprises in the Czech Republic still do not have enough information about what it would mean for them if the state declared a state of emergency in the gas industry and started regulating consumption. In this regard, the government and its responsible ministries owe a lot to entrepreneurs. At the same time, three quarters of companies use gas to heat company premises, mostly in retail, tourism and gastronomy. Being cut off from gas would mean a serious threat of bankruptcy for many of them. For companies for which gas is a key production raw material, the situation would be even worse.
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However, the main problem remains high inflation, which has been continuously rising in the Czech Republic since last fall and is about to attack the 20 percent mark by the end of the year.
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In the fight against inflation, which is mainly driven by food and energy prices, it is important to break the belief that inflation will be high in the long term. But that doesn’t work in the Czech Republic. According to currently published data, companies in the Czech Republic expect inflation to still be above 7 percent over a three-year horizon. At the same time, the central bank’s target is more than three times lower.
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The August meeting of the CNB will be crucial for the further development of inflation, the exchange rate of the koruna and the faith of companies and households in the return of stable prices in the economy. It will be the first monetary meeting with the new governor Aleš Michl. All signals about inflationary pressures clearly point to the fact that the Bank Board should raise interest rates again.
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The new governor has so far refused to raise interest rates, but it is hard to imagine that, in the face of inflationary reality and the crumbling confidence of companies and residents in the return to “normal”, he could close his eyes to the rise in prices.
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![Initial calculations of pensions after indexation in 2023. Here is a table of calculating this benefit [18.07.2022]](https://d-art.ppstatic.pl/kadry/k/r/1/8f/35/62cff043c9b44_o_original.jpg "Initial calculations of pensions after indexation in 2023. Here is a table of calculating this benefit [18.07.2022]")
