Slow and steady wins the race

The economy is growing again. It is no sprint, but after several lean years, GDP growth of 2.5 percent in the first half of this year is a solid result. However, the long-term outlook remains hampered by an aging population, a long-term decline in the growth of production factors, and low investment in education, science, and research. Economic growth is also being slowed by structural problems and declining competitiveness in Germany and other key trading partners.

The current growth is being driven by a recovery in household demand from the inflation crisis in 2022 and 2023. Wages have been growing faster than retail prices for the second year in a row, and household consumption expenditure is also increasing in real terms. Nevertheless, wages and household consumption have not returned to the levels they reached before the series of crises at the end of 2019.

Investment remains a weak point in the Czech economy. It has been falling for six quarters in a row in year-on-year terms. With corporate taxes and interest rates rising, this should come as no surprise. As part of fiscal consolidation, corporate income tax has been increased by two percentage points. The CNB had to respond to inflation by tightening monetary policy. However, frightened by inflation, it forgot to respond in a timely and consistent manner by lowering interest rates to support investment and economic growth once inflation had subsided.

Germany is also a brake on our economy. The GDP of our main trading partner has been declining for the third year in a row. The combination of growing domestic demand and weak foreign demand has logically resulted in a deterioration in the foreign trade balance.

In relation to the EU average, GDP per capita based on purchasing power parity should reach 93 percent this year. In 2019, however, we were already at 95 percent, and a year later even at 96 percent of the EU average. While the Czech Republic is still waiting at the crossroads, Poland and even Romania are rapidly catching up. In terms of per capita consumption based on purchasing power parity, as an indicator of living standards, both countries have already overtaken us according to Eurostat data and are pulling away.