Economist: Recession will hit Czechia harder than most other EU states in 2023

Czech National Bank

Demand is falling and the economy is headed for recession according to the head of the Czech National Bank Aleš Michl. Meanwhile, the IMF’s chief Kristalina Georgieva has said that half of the European Union will experience a recession in 2023. So is a recession coming and how hard will Czechia be hit? Those are some of the questions I put to Cyrrus bank economist Vít Hradil.

“I do agree and I would be more specific than that. I would say that we actually are in a recession as we speak. Recession is defined as two quarters of real GDP decrease. We already saw the first one in the third quarter of 2022. Now we are just waiting for data for the fourth quarter, but I am pretty sure that there is going to be a decline there as well.

Aleš Michl  | Photo: Anna Duchková,  Czech Radio

"So we already are in a recession, at least as far as I am concerned. I think that we will probably be more affected than most of the other countries in the EU.”

Mr Michl also said that getting on top of inflation would remain the priority for the Czech National Bank also this year and that the recession could help with this process. Do you think inflation will start decreasing noticeably in the spring, as the head of the Czech National Bank promised?

“Yes, it will. This is something that central bankers are hesitant to admit publically. A lot of people don’t really like this, but we don’t really know of any other way to combat inflation other than by causing an economic downturn.

"This is why central banks raise interest rates. Although they obviously don’t want an economic downturn, it’s the only tool they have to fight inflation. If you couple that with skyrocketing energy prices, this results in people not having a lot of money and not being able to take out loans and spend, so they won’t be buying as many houses, TV’s, etc. Therefore, since there is little demand, producers cannot raise prices and thereby inflation should start decreasing.

“There are going to be two effects at play. On the one hand, the dropping demand will lead to downward pressure on inflation. On the other hand, there will still be some effect of the energy price rise. This phenomenon will still be present at the beginning of the year when a lot of the new prices on natural gas and electricity will come into effect.

Photo: René Volfík,

"They will all be more expensive than last year, so this will be a pro-inflationary effect. This will dissipate after the first months and we will be left with this anti-inflation effect of dropping demand. So I would agree that inflation will start dropping in the spring.”

Along with recent crises we’ve seen Czechia’s public debt rising significantly over the past years. The government has approved a budget for 2023 which counts on a further CZK 375 billion deficit. How concerned should we be about Czechia’s rising debt to GDP ratio?

“Not in the short term. We did start will a very low level of debt by European standards and even now when we are spending significant amounts it isn’t enough to push us into dangerous territory. Current projections see our debt to GDP ratio rising to around 45 percent over the span of the next three years.

"45 percent is still not much. If I am not mistaken, the United States has a debt to GDP ratio of around 100 percent. Greece, the most famous recent example of a country that went bust, stands at around 180 percent. So I wouldn’t be worried about any imminent bankruptcy.

"However, there is one threat when it comes to our budget. The deficits that we have run in the past three years and those that we are planning to have in the future are structural. That’s something that will still be there even when the crisis goes away. This will necessitate some kind of political action. It isn’t going to go away because of good economic weather. It is going to require some politicians to make quite painful adjustments either on the expenditure or revenue sides.

"The only worry that I have in this regard is whether we will find political will to change this in the medium to long term. Because if we don’t, we might be facing some trouble in 10 years’ time.”