The International Monetary Fund (IMF) Executive Board has concluded its 2024 Article IV consultation with the Czech Republic. The consultation, which took place on January 24, 2025, was endorsed on a lapse-of-time basis without a formal meeting.
The Czech economy is experiencing a slow recovery following a period of stagnation. Growth began to pick up in late 2023, driven by increased consumer spending due to rising real wages and a decrease in household saving rates. However, investment remains weak due to uncertainties in global trade and domestic policies.
Inflation in the Czech Republic has been influenced by lower commodity prices and restrictive monetary policy. It reached the Czech National Bank's (CNB) target of 2 percent but rose to 2.8 percent by October 2024 due to volatile food prices. Core inflation stood at 2.4 percent.
Looking ahead, growth is expected to continue recovering into the second half of the year despite challenges from restrictive policies and a weak external environment. In 2025, fiscal policy is anticipated to become neutral as inflationary pressures ease, allowing for potential monetary policy relaxation.
The IMF staff highlighted structural issues such as labor shortages and weak productivity growth that could hinder medium-term economic potential. "Despite the cyclical upswing...weak productivity growth and structural labor shortages are set to weigh down medium-term potential growth," noted the report.
Risks remain on both sides for growth and inflation. The IMF identified potential downside risks from geoeconomic fragmentation and weaker recoveries among European trading partners like Germany. Conversely, stronger wage growth could increase inflationary pressures.
Monetary policy adjustments are suggested with room for further rate cuts as inflation expectations stabilize. "Staff sees ground for continuing to lower the policy rate," indicating additional rate cuts could help achieve a neutral policy rate by mid-2025.
On fiscal matters, maintaining a broadly neutral stance this year is seen as appropriate while recommending further adjustments over the medium term to manage spending pressures effectively.
Financial stability risks are contained but require vigilance according to the IMF assessment. Real estate risks should be monitored closely alongside bank exposures and credit risk evaluations.
Finally, swift action is recommended for supporting economic transformation through structural policies aimed at enhancing labor allocation towards higher value-added sectors and promoting digitalization and green transitions.