COMMISSION STAFF WORKING DOCUMENT In-depth review for Czechia Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester - Spring Package
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: Czechia, European Semester, competitiveness, economic policy, energy policy, fiscal policy, housing policy, inflation, macroeconomics, price increase, property market

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.5.2023  SWD(2023) 628 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Czechia Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester - Spring Package               {COM(2023) 600 final} - {SWD(2023) 629 final} - {SWD(2023) 630 final} - {SWD(2023) 631 final} - {SWD(2023) 632 final} - {SWD(2023) 633 final} - {SWD(2023) 634 final} - {SWD(2023) 635 final} - {SWD(2023) 636 final} - {SWD(2023) 637 final} - {SWD(2023) 638 final} - {SWD(2023) 639 final} - {SWD(2023) 640 final} - {SWD(2023) 641 final} - {SWD(2023) 642 final} - {SWD(2023) 643 final} - {SWD(2023) 644 final}  
 
 
Czechia 

In-Depth Review 2023 

 
 
 
 
 
 
 
 
 
 
 
On  the  basis  of  this  in-depth  review  for  Czechia  undertaken  under 
Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic  imbalances,  the  Commission  has  considered  in  its 
Communication “European Semester – 2023 Spring Package” (COM(2023) 
600 final) that: 

Czechia  is  not  found  to  experience  imbalances.  Vulnerabilities  relate  to  price 
competitiveness  and  house  prices, but  seem limited  going  forward  as  household 
debt is contained and inflation is expected to decelerate significantly faster than 
the  EU  average.  The  economy  was  strongly  affected  by  the  energy  price  shock 
with  inflation  rising  fast.  A  loose  fiscal  stance  since  the  pandemic  has  also 
contributed  to  the  acceleration  of  inflation.  While  overall  price  pressures  remain 
elevated, cost competitiveness is projected to partially recover going forward amid 
falling  energy  prices,  without  there  being  any  immediate  external  sustainability 
challenges.  Inflation  is  expected  to  decelerate  significantly  faster  than  the  EU 
average.  However,  if  inflation  persist,  that  could  pose  some  risks  for  Czechia’s 
competitiveness.  The  recent  deterioration  of  the  current  account  warrants  close 
monitoring going forward. In recent years, demand for housing increased strongly, 
spurred by low interest rates, high income growth and loosened macroprudential 
measures,  and  supply  of  housing  did  not  keep  up.  House  prices  grew  more 
strongly  during  the  pandemic  but  started  to  moderate  in  mid-2022  amid  higher 
interest rates and stricter lending conditions. However, risks of a significant house 
price  correction  appear  to  be  low,  household  debt  is  contained,  and  the  banking 
sector is sound; a continued limited supply response over the medium-term would 
nonetheless  continue  to  drive  prices  up.  Continued  efforts  are  needed  to  rein  in 
inflation. Bringing inflation down quickly requires a strong deceleration in demand 
growth,  which  in  turn  can  be  achieved  by  sufficiently  tight  monetary  and  fiscal 
policy. 

 
 
 
 
 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic vulnerabilities 

LIST OF TABLES 

Table 2.1: 
Table 2.2: 

Selected economic and financial indicators (Part 1), Czechia 
Selected economic and financial indicators, Czechia 

LIST OF GRAPHS 

Graph 2.1:  Selected graphs, Czechia 

Graph 2.2:  HICP differentials 

Graph 2.3:  Components of gross fixed capital formation deflator growth and consumer price inflation 

4 

5 

17 
18 

14 

15 

16 

 
 
 
 
 
 
 
1. 

INTRODUCTION 

In  2022,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalance Procedure (MIP), Czechia was not subject to an in-depth review to assess its 
vulnerabilities. (1) The 2023 Alert Mechanism Report published in November 2022 concluded that 
an in-depth review (IDR) should be undertaken for Czechia this year, with a view to examine newly 
emerging vulnerabilities and their implications. The AMR concluded that in Czechia, concerns related 
to cost competitiveness and house price developments, which existed already before the COVID-19 
pandemic,  persist.  Nominal  unit  labour  costs  are  set  to  grow  further,  with  an  appreciation  of  the 
real  effective  exchange  rate  being  underway  and  core  inflation  being  very  high  compared  to 
Czechia’s  euro  area  peers.  Nominal  house  price  growth  has  been  amongst  the  highest  in the  EU, 
while house prices are estimated as being overvalued.  

Czechia’s  post-pandemic  recovery  was  impeded  by  surging  inflation  in  2022  and  is 
expected to remain weak in 2023. (2) In 2022, the Czech economy grew by 2.5%, dampened by 
a worsening financial situation of households, slowing external demand and receding problems in 
global value chains. Economic activity is forecast to increase only moderately (0.2%) in 2023 driven 
by  exports  but  being  held  back  by  low  consumption  on  the  back  of  a  decline  in  real  disposable 
income, a tight financial situation of households, and rather low consumer sentiment. GDP growth 
is  forecast  to  increase  by  2.6%  in  2024  supported  by  recovering  domestic  demand  and  an 
improving  economic  situation  in  Czechia’s  main  trade  partners.  Consumer  price  inflation  (HICP) 
increased to 14.8% in 2022 and peaked at 19.1% in January 2023, driven by fast-growing prices 
for commodities and production inputs. Cost pressures are set to ease during 2023 on the back of 
a decline in real income and tight monetary policy, bringing inflation down to 11.9% in 2023 and 
3.4% in 2024. More expansionary fiscal policy presents an upside risk to both the growth and the 
inflation  forecast.  If inflation  expectations  become unanchored  and  contribute to  wage  increases, 
inflation could exceed expectations. At the same time, downside risks could stem from a stronger-
than-forecasted downturn in domestic consumer and investment demand.  

This  in-depth  review  presents  the  main  findings  of  the  assessment  of  macroeconomic 
vulnerabilities for Czechia. Vulnerabilities related to housing and competitiveness in Czechia are 
also  discussed  in  horizontal  thematic  notes  that  were  recently  published. (3)The  MIP  assessment 
matrix is published in the 2023 Country Report for Czechia. (4) 

(1)  European Commission (2022), European Semester Spring Package 2022, COM(2022) 600 final. 

(2)  European Commission (2023), European Economic Forecast: Spring 2023, Institutional Paper 200. 

(3)  European  Commission  (2023),  Housing  Market  Developments:  Thematic  Note  to  Support  In-Depth  Reviews,  European 
Economy:  Institutional  Papers,  197.  European  Commission  (2023),  Inflation  Differentials  in  Europe  and  Implications  for 
Competitiveness: Thematic Note to Support In-Depth Reviews, European Economy: Institutional Papers, 198.  

(4)  European Commission (2023), Country Report Czechia 2023, SWD(2023) 603 final. 

4 

 
 
 
 
 
                                                 
 
2.  ASSESSMENT OF MACROECONOMIC 
VULNERABILITIES 

Gravity, evolution and prospects 

Czechia  has  been  facing  several  vulnerabilities  that  need  to  be  monitored.  The  Czech 
economy enjoyed a robust expansion before the COVID-19 pandemic, with GDP growth averaging 
3.6%  per  year  between  2014-2019.  While  inflation  stood  at  3.3%  in  2020  and  2021,  the  Czech 
economy was negatively impacted by very high inflation in 2022 and 2023-Q1, related to the rapid 
increase  in  energy  prices  that  accompanied  the  Russian  invasion  of  Ukraine.  Currently,  while 
slowing  down,  inflation  in  Czechia,  including  core  inflation,  is  substantially  higher  than  the  euro 
area  average.  If  the  high  rate  of  inflation  turns  out  to  be  persistent,  it  could  negatively  affect 
Czechia’s  competitiveness.  Amid  supply-side  frictions  and  a  strong  increase  in  energy  prices, 
external balances deteriorated in 2022, but concerns are limited by the strong stock position of the 
net  international  investment  position.  In  parallel,  the  Czech  economy  has  experienced  very  rapid 
house  price  growth  since  the  pandemic.  This  IDR  examines  the  possible  implications  of  these 
developments to assess the extent of vulnerabilities facing the Czech economy and whether they 
are a cause for concern for the near future.  

Housing Market 

On 5 April 2023, the Commission presented a horizontal thematic note on housing, which 
also  covers  Czechia.  It  showed  that  house  prices  more  than  doubled  over  the  last  decade  in 
Czechia.  Since  2010  house  prices  have  grown  by  over  120%  in  nominal  terms,  compared  to  a 
42.5% of consumer price increase. Lower interest rates have played a significant role in increasing 
demand  for  housing  (graph  2.1  e).    Nevertheless,  since  2020  house  prices  have  increased  well 
beyond  what  would  seem  to  be  explained  by  low interest  rates  and  rising  household  incomes.  In 
addition,  relative  to  rents,  house  prices  have  appreciated  more  significantly  over  recent  years. 
Overall, house prices appear overvalued by around 30% (Q3 2022). 

Multiple  factors  drove  house  price  growth  in  last  decade  and  its  recent  acceleration. 
A low  interest  rate  environment,  solid  growth  in  disposable  income,  rather  loose  credit  standards 
and optimistic expectations about future price growth were the key drivers of house price increases 
in  last  decade.  This  was  coupled  with  a  very  weak  response  in  housing  supply,  to  which  also 
contributed deficiencies in the existing legislation like the Building Act (5) and capacity constraints 
of local public administrations. An insufficiently developed rental market also played a role. After 
the  outbreak  of  the  pandemic,  property  prices  accelerated  even  more  due  to  a  further  easing  of 
monetary  policy  but  also  temporary  macroprudential  easing.  This  was  accompanied  by  the 
spreading of remote working and supportive government measures, which protected the purchasing 
power of households and further boosted the demand for housing. On the supply side, construction 
output  declined notably in 2020 by 4.8%, with  only a mild recovery in 2021 of 2.5%. During the 

(5)  Building Act (No. 183/2006 Coll.) that sets out the conditions for granting building permits, procedures for construction but 

also deals with urban and territorial planning. 

5 

 
 
                                                 
 
2. 

Assessment of macroeconomic vulnerabilities 

first  half  of  2022,  large  household  savings,  accumulated  during  the  pandemic,  as  well  as 
frontloading  effects  related  to the announced  tightening  of  macroprudential  policy measures  and 
expected  increase  in  mortgage  interest  rates  contributed  to  a  further  increase  in  the  price 
dynamics.  Furthermore,  high  inflation  and  increasing  labour  costs  in the  construction  sector  have 
been driving up prices of new buildings in the recent years. 

Housing affordability in Czechia is among the lowest in the EU. The ratio of house prices to 
income is now over 50% higher than a decade ago and over a third higher than their peak level at 
the  start  of  the  global  financial  crisis.  Czechia  now  emerges  as  one  of  the  least  affordable 
countries in the EU. For example, according to Deloitte (6) the purchase of owner-occupied housing 
in Czechia (70 m2) required more annual gross salaries (13.3) than in any other EU country and the 
average  transaction  price  of  a  new  dwelling  attained  3342  EUR/m2  in  2021  (compared  to  2014 
EUR/m2  in  Hungary  or  1729  EUR/m2  in  Poland).  According  to  Deloitte  Real  Index  Q4  2022,  the 
average price per m2 in Prague (slightly below 5000 EUR per m2) is now well above house prices in 
other capital cities of the regional peers.  

Housing supply in Czechia has been rather weak and lagged behind the strong demand. 
There are long-term supply bottlenecks due to rigid urban planning and a long approval process for 
new developments. The average growth in the number of constructed dwellings was 8.8% over the 
5  years  before  the  pandemic.  The  number  of  newly  constructed  dwellings  decreased  by  5.4%  in 
2020  and  stagnated  in  2021,  as  a  result  of  the  slowdown  in  construction  activity  during  the 
pandemic.  The  supply  of  housing  increased  again  in  2022,  with  the  number  of  constructed 
dwellings growing by almost 14%. The number of building permits for new buildings in Czechia has 
been decreasing each year since 2018. In 2020, it took an average of 250 days to obtain a building 
permit in Czechia, compared  to around 150 days for the OECD  average. Relevant constraints are 
largely of an administrative nature (such as inefficient construction law, strict zoning rules,). In this 
respect,  the  regulatory  framework  has  represented  the  main  obstacle  to  higher  rates  of  new 
housing  construction.  This  applies,  in  particular,  to  lengthy  and  administratively  demanding 
processes in construction and spatial  planning procedures. Beyond administrative bottlenecks, the 
strong demand for city living is putting upward pressure on house prices in Prague and Brno and 
reinforcing regional differences in house prices. 

The  rental  market  in  Czechia  presents  a  relatively  limited  alternative  to  purchasing  a 
property,  and  the  stock  of  social  housing  is  insufficient.  Despite  the  price-to-rent  ratio 
increasing  strongly  over  the  last  decade,  which  should  make  the  renting  more  attractive,  only 
around 20% of the Czech households live in rental housing (compared to the EU average of 30%, 
2021  figure).  The  limited  offer  in  the  rental  market  further  boosts  the  demand  for  acquiring 
properties.  Since the pandemic, rental prices have increased above their long-term growth rates, 
but still lagged behind the sharp increase in house prices. Notable acceleration of rental prices has 
been recorded in the last year amid significant increase of mortgage rates constraining households’ 
ability  to  purchase  a  property.  In  Czechia,  there  is  also  a  comparatively  low  supply  of  social 
housing.  The  proportion  of  social  housing  out  of  the  total  stock  of  rental  dwellings  is  0.4%,  well 
below the EU average. It is limited, in particular for low-income and vulnerable groups, due to the 
absence of a legal framework providing systemic support for social housing. The municipal rental 
stock is very small and there are no incentives to offer rental or cooperative housing, which would 
increase the supply  of affordable housing. Constrained access to housing and underused housing 
allowances induce substantial economic costs and efficiency losses by limiting labour mobility. The 
integration  of  people  fleeing  Ukraine  and  staying  in  Czechia  further  increases  the demand  for 
affordable housing. In recent years, investment in new social housing units has relied mostly on EU 
funding. Czechia’s Recovery and Resilience Plan includes some investments aimed at increasing the 
provision of affordable housing. 

(6)  Deloitte (2022): Property Index – Overview of European residential Markets, 11th edition, August 2022. 

6 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

The  housing  market  appears  to  be  cooling  off  since  summer  2022.  Monetary  policy 
tightening that started in the second half of 2021 gradually translated into a considerable rise in 
mortgage interest rates by some 3-4 percentage points over the last year. This led to a decline in 
annual provision of new mortgage credit by 60% in 2022, concentrated particularly in the second 
half of 2022. In reaction to the slump in debt-financed demand for housing, house price dynamics 
began to slow down in Q2 2022. Quarter-on-quarter growth of house prices in Q4 2022 declined 
by 2.2%, down from 1.3% increase in Q3 and 3.9% increase Q2. Annual house price growth stood 
at 17% in 2022 (and 7% in Q4 2022), down from 20% in 2021 (and 25% in Q4 2021). The listing 
of  properties  on  the  market  has  increased  substantially  since  the  second  quarter  of  2022, 
signalling  increasing  supply  of  housing.  This  increase  has  however  been  mainly  driven  by  an 
increased  number  of  second-hand  properties  offered  for  sale  amid  a  significant  tightening  of 
financing conditions for home purchase. The number of listings has roughly doubled in the second 
half of 2022, and it seems to have stabilised at the beginning of 2023. Higher frequency data of 
private providers suggest a significant regional differentiation with some regional capitals such as 
Ústí na Labem or České Budějovice showing a double-digit decline of house prices (in annual terms) 
in early 2023.  

Increases in mortgage rates do not seem to pose risks to the banking sector. Historically, 
the  most  common  mortgage  rate  fix  in  Czechia  is  around  five  years.  Many  households  took 
advantage in 2021 and early 2022 to refix the mortgage interest rate in anticipation of monetary 
tightening. Consequently, there will not be an immediate increase in mortgage payments for most 
current  mortgage  holders,  but  rather  a  gradual  increase  as  fixed  periods  end.  Overall,  mortgage 
interest  payments  do  not  make  out  a  substantial  share  of  GDP.  Thus,  the  increases  in  interest 
payments should not have a substantial effect on the banking sector. The Czech banking sector is 
well  capitalised,  and  the  ESRB  assessment  from  February  2022  was  that  the  macroprudential 
policy mix appears to be both appropriate and sufficient. While recent years were marked by strong 
credit flows, which peaked in early 2022 and represented a sharp increase in nominal debt levels, 
over  the  last  decade  household  debt  has  edged  up  only  gradually  and  represents  some  34%  of 
GDP.  This  is  well  below  prudential  and  fundamental  benchmarks.  While  not  being  substantial  in 
size,  household  debt  is  concentrated  among  a  small  share  of  the  population  with  mortgages. 
Czechia  introduced  a  new  law  on  personal  insolvency  in  2017,  which  has  made  it  easier  for 
individuals to apply for debt relief and avoid bankruptcy and may have contributed to the overall 
decrease in personal insolvencies in the country. (7) 

Going forward, a number of factors support expectations of only moderate house price 
dynamics  going  forward,  while  housing  affordability  remains  a  challenge  in  Czechia. 
Demand  for  housing  is  set  to  be  constrained  by  lower  disposable  income  of  households  amid 
expected negative real wage growth in 2023. The increase in interest rates in the past two years 
and the tightening of macroprudential measures since mid-2022 was also reflected in tighter credit 
standards in the banking sector. The more difficult access to credit alongside the current economic 
slowdown, the reduction in household purchasing power and increased economic uncertainty weight 
on housing demand. On the supply side, envisaged policy measures, such as the shortening of the 
time to obtain a building permit or the support of government affordable housing, should stimulate 
housing supply in medium term. Taking these demand and supply factors  together, the growth of 
property prices is expected to be moderated in the coming years. Moreover, it is expected that there 
will  be  stronger  regional  differences  in  local  housing  supply. While  in  real  terms,  the  house  price 
dynamics are expected to remain relatively muted, the price-to-income ratios may take some years 
to return to pre-pandemic levels, making housing affordability a persistent challenge, especially in 
some urban areas. 

(7)  According to the data from the Czech Credit Bureau, the number of personal bankruptcies in has been decreasing steadily 
over  the  past  few  years.  In  2019,  there  were  around  8,660  personal  insolvencies,  which  was  a  decrease  of  11.8% 
compared  to  the  previous  year.  The  trend  of  decreasing  personal  insolvencies  continued  in  2020  despite  the  pandemic, 
with a total of 6,721 cases reported, which was a decrease of 22% compared to the previous year. 

7 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Competitiveness 

On  5  April  2023,  the  Commission  published  a  horizontal  thematic  note  on 
competitiveness, which also covers Czechia. It showed that the domestic part of inflation (i.e. 
domestic wage, markup and taxation dynamics) played a particularly strong role in the recent surge 
in inflation in Czechia – more so than in other countries in the region. Nevertheless, export prices 
are  strongly  driven  by  import  price  developments,  rather  than  by  domestic  factors.  At  the  same 
time,  domestic  demand  and  observed  price  pressures  could  still  lead  to  external  sustainability 
concerns  via  import  developments  going  forward,  warranting  close  monitoring.  Expected  wage 
increases are likely to lead to an appreciation of the ULC-based real exchange rate in 2023. 

Inflation in Czechia grew rapidly in 2022 and the first quarter of 2023. Headline inflation 
in Czechia usually outpaces average inflation in the EU  somewhat, but since 2022 inflation rates 
have strongly diverged (graph 2.1 a). From an average HICP inflation rate of around 3% over 2019-
21,  which  already  presented  an  acceleration  vis-à-vis  the  previous  decade,  inflation  jumped  to 
14.8% in 2022. Inflation peaked at 19.1% in January 2023 and started declining afterwards. The 
rise  in  consumer  prices  was  broad-based.  Fast-growing  prices  for  food  and  energy  played  an 
important role. At the same time, the impact of energy inflation on households and businesses was 
cushioned by various support measures taken by the government. Price increases of services and 
non-energy  industrial  goods  were  more  pronounced  than  in  other  countries  in  the  region, 
suggesting  important  contributions  of  supply-side  bottlenecks,  the  material  shortages,  and 
transportation  cost.  As  a  result,  core  inflation  jumped  to  12.4%  in  2022;  considerably  above  the 
rates observed for the EU (9.2%) and the EA (8.4%).  

An  expansionary  fiscal  stance  in  2020-2021  is  also  likely  to  have  contributed  to  the 
acceleration  of  inflation.  As  a  response  to  the  COVID-19  crisis,  the  government  introduced  a 
series of measures to support the economic recovery. Several measures were initially presented as 
temporary  but  have  eventually  been  made  permanent.  Although  the  support  provided  during  the 
pandemic  and  during  the  energy  crisis  was  warranted,  the  permanent  measures  could  have 
contributed to further fuelling the inflation during 2022. The phasing out of energy measures and 
the limited growth of other government expenditures is expected to lift some of the pressures on 
inflation this year and next. 

Core and HICP-based REERs have been appreciating in Czechia since 2016, both vis-à-vis 
the euro area and its 42 main trade partners. Since 2018, the core REER appreciated by more 
than 15 %, out of which 10 pps occurred over 2022, pointing at a marked acceleration (graph 2.1 
b).  Czechia’s  HICP  and  ULC-based  REER  appreciation  in  2022  outpaced  those  observed  in  other 
countries  in  the  region.  Both  nominal  unit  labour  cost  growth  and  exchange  rate  dynamics 
contributed to the ULC-based REER developments. The koruna appreciated, driven by interest rate 
differential  and  better  market  sentiment  related  to  the  CNB’s  declaration  that  it  was  ready  to 
prevent  excessive  fluctuations  of  the  koruna,  using  foreign  exchange  reserves  to  support  the 
domestic currency in a few instances.  

Unit  labour  costs  grew  faster  than  in  the  EU  over  the  last  decade  and  growth 
accelerated  in  recent years.  The  annual  average  growth  of  nominal  unit  labour  costs  (ULC) in 
Czechia was 3% over the years 2012-2022, compared to an EU average of 1.7% (graph 2.1 c). The 
longer-term growth trend stems from persistently higher inflation, but also reflects that real wage 
growth persistently outperformed productivity growth since 2016. A sustained process of catching-
up  towards  EU  averages  contributes  to  strong  wage  developments.  In  addition,  the  tight  labour 
market adds further pressure. The Czech unemployment rate was very low at 2.2% in 2022, and 
the employment rate very high (81.3% vs EU27: 74.7%).  In 2022, nominal ULC growth in Czechia 
accelerated further to an annual  rate of 4.8% versus 2.7% in the EU. While  nominal wages grew 

8 

2. 

Assessment of macroeconomic vulnerabilities 

relatively fast (by 6.8% in 2022), real wages declined due to the high inflation (by 1.8% when using 
the GDP deflator and 9.2% when using the private consumption deflator in 2022).  

Government  policy  has  a  limited  direct  influence  on  wage  developments,  with  the  only 
tool  being  the  minimum  wage.  The  government  influences  wage  developments  in  the  private 
sector only indirectly by setting minimum wages and minimum guaranteed wage levels for specific 
job  groups  according  to  the  complexity,  responsibility  and  difficulty  of  the  work  performed.  The 
minimum wage in Czechia remained at 40% of the average nominal wage for more than 5 years, 
as  minimum  wage  increases  were  largely  aligned  with  the  overall  wage  dynamics.  Unlike  in 
previous years, the latest increase in the minimum wage was not accompanied by a corresponding 
rise in the minimum levels of guaranteed wages.  

The  persistence  of  inflation  differentials  represents  a  risk  to  competitiveness  going 
forward.  Inflation  is  expected  to  ease  to  11.9%  in  2023  and  to  fall  to  3.4%  in  2024.  Should 
inflation  rates  remain  above  those 
longer,  Czechia’s  cost 
competitiveness  could  deteriorate  further  if  not  counteracted  by  productivity  growth.  Higher 
inflation rates could spill into wage negotiations, especially after the decline in real wages in 2022. 
Nominal ULC growth is expected to remain high but should remain in check as there is little concern 
for a possible price-wage spiral. Still,  recorded inflation differentials pose a challenge to the cost 
competitiveness of the Czech economy going forward. 

in  major  trade  partners  for 

The external balance of Czechia has deteriorated in recent years. Over the period 2014-19, 
Czechia  continued  to  record  small  current  account  surpluses.  In  2020,  Czechia’s  current  account 
balance  first  picked  up  to  2%  of  GDP  and  moved  subsequently  into  a  deficit  of  2.8%  of  GDP  in 
2021.  The  deficit  further widened  to  6.1%  of  GDP in  2022.  The  evolution  of the  current  account 
was  mainly  shaped  by  the  developments  in  the  balance  of  trade  in  goods,  which  moved  from  a 
surplus of 4.9% of GDP in 2020, down to 1.1% in 2021 and to  -1.5% of GDP in 2022. Over the 
same period, the balance of trade in services, as well as the primary income account also declined, 
albeit mildly, while the secondary income account remained stable.  

In 2021, the trade balance deteriorated mainly on account of deteriorating non-energy 
trade volumes, whereas in 2022 the energy price increase dwarfed other dynamics.  The 
balance of trade volumes in goods and services excluding energy has deteriorated over 2020-22 
and is expected to further deteriorate and turn into a deficit over the forecast horizon. The terms of 
trade  of  non-energy  exports  had  a  moderating  impact;  but  the  energy  price  effect  had  a 
particularly strong negative impact on the trade balance in 2022. Its impact is expected to dissipate 
in 2023 and 2024  – but non-energy terms of trade effects are likely to start dragging the trade 
balance downwards over the forecast horizon (graph 2.1 d).  

Czechia’s  net  international  investment  position  (NIIP)  was  negative  and  amounted  to  
-19.7% of  GDP  in  2022,  down  from  -14.5% of  GDP  at  the end of  2021.  The decline  was 
mainly driven by net transaction effect on top of the deficit on the investment income balance. The 
negative  investment  position  continues  to  reflect  the  extensive  ownership  interests  of  foreign 
investors  in  the  Czech  economy,  which  are  regarded  as  materially  less  risky  from  the 
macroeconomic  vulnerability  viewpoint  than  indebtedness  related  to  debt  instruments.  Thus,  the 
NIIP  excluding  non-defaultable  instruments  (NENDI),  is  much  more  favourable  for  Czechia  and 
amounts  to  28.3%  of  GDP  end  of  2022.  Overall,  given  Czechia’s  sound  stock  position,  Czechia’s 
NIIP currently does not present a particular reason for concern even if the negative current account 
developments warrant close monitoring going forward. 

9 

2. 

Assessment of macroeconomic vulnerabilities 

Assessment of MIP relevant policies 

Housing  market  developments  have  been  affected  by  monetary  and  macroprudential 
tightening  in  recent  years.  Faced  with  rising  prices  and  a  risk  of  de-anchored  inflation 
expectations, the Czech National Bank (CNB) has started early to tighten monetary policy. Between 
June  2021  and  June  2022,  it  raised  the  policy  interest  rate  from  0.25%  to  7%.  The  monetary 
tightening  and  the  increase  in  mortgage  interest  rates  contributed  to  a  sizeable  drop  in  the 
provision  of  new  mortgage  credit  in  second  half  of  2022,  which  was  accompanied  a  decline  in 
house  prices  in  the  recent  months.  The  CNB  has  also  implemented  several  macroprudential 
measures  over  the  past  years.  Loan-to-value  (LTV),  debt  service-to-income  (DSTI),  and  debt-to-
income (DTI) ratios were introduced in 2017 to limit the amount of risky mortgages being issued by 
banks. The CNB also imposed on banks requirements for a counter-cyclical capital buffer (CCyB) in 
2019.  In  response  to  the  COVID-19  pandemic,  the  CNB  eased  the  macroprudential  measures  in 
2020, such as temporarily lifting the limit on the LTV ratio for borrowers who had lost their jobs or 
had  a  significant  decline  in  income,  and  the  abolition  of  DSTI  and  DTI  limits.  The  easing  of  the 
macroprudential  stance,  combined  with  low  interest  rate  supported  the  mortgage  borrowing 
between  2020  and  early  2022.  The  macroprudential  measures  were  tightened  again  as  of  April 
2022. 

The  efficiency  of  the  housing  market  could  be  improved  by  facilitating  housing  supply, 
and  some  measures  have  been  adopted.  While  demand  for  housing  has  been  cooling  off 
recently  in  response  to  tighter  monetary  conditions  and  strict  macroprudential  policies,  supply  of 
housing has been facing several constraints which have contributed to the long-standing increases 
in property prices. In 2017 Czechia started working on the recodification of the public construction 
law,  which  formed  a  basis  for  the  new  Building  Act.  The  new  Building  Act  is  designed  to  bring 
significant  acceleration  of  the  process  of  granting  construction  permits  for  all  types  of 
constructions. Key elements comprise a significant reduction of the number of approval processes 
for a single construction permit, with strictly set time limits, as well as the digitalization of zoning 
and  building  management.  Some  additional  measures  that  the  Czech  government  has  taken  to 
support  the  supply  of  housing  include:  (i)  increased  funding  for  the  State  Housing  Development 
Fund,  which  provides  loans  and  grants  to  developers  and  municipalities  for  affordable  housing 
projects; (ii) reduced VAT rates for constructions related to social housing; (8) (iii) introduction of a 
programme  to  encourage  renovation  of  existing  buildings  for  affordable  housing,  with  financial 
incentives for property owners; (iv) expansion of public-private partnerships to increase the supply 
of affordable rental housing; (v) launch of a programme to promote energy-efficient construction 
and renovation, which aims to reduce energy consumption in buildings and lower energy costs for 
residents.  

Some  systemic  support  for  affordable  housing  is  being  put  in  place.  While  several 
measures target low-income groups and young families (e.g. through subsidised rents, guaranteed 
rents,  interest-free  loans  or  subsidies  to  cover  the  rental  deposit),  the  supply  of  affordable  and 
social  housing  is  insufficient,  as  recognised  also  by  Czechia’s  country  specific  recommendations 
and Recovery and Resilience plan.  In 2022, the Czech government implemented the sub-program 
“Supported housing” to expand the offer of subsidised apartments (i.e. rental apartments intended 
for  social  housing).  Two  additional  support  programs  are  being  prepared  for  construction  and 
renovation, to be announced in April 2023. In addition, a draft law on housing support is planned to 
be  proposed  still  this  year,  coming  into  effect  in  2025.  The  aim  of  this  law  is  to  create  a  legal 
framework for municipalities to ensure support for households threatened by housing shortage or 
already in housing shortage, and to increase the availability of rental housing.  

(8)  According to articles 48 and 49 of VAT Act (No. 235/2004 Coll.) 

10 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Recurrent property taxation is low and does not have an impact on property prices, and 
transaction taxes were permanently removed during the pandemic. Over the years, the tax 
system  has  continued  to  favour  homeownership  through  low  recurrent  property  taxation  and 
promoted debt-financed housing acquisition. In advance of an anticipated negative impact of the 
COVID-19 crisis on house prices, the government has permanently eliminated at the end of 2020 
the 4% transaction tax that was applied on all property transactions. This is likely to have further 
contributed  to  the  increase  in  property  prices  during  the  past  3  years.  In  addition,  the  remaining 
recurrent property taxation is very low at 0.2% of GDP compared to 1.1% EU average. The tax is 
based on the size of property and its level has not been adjusted since 2009. Recent discussions 
point to a potential increase in the taxation levels but the increase is not likely to have a significant 
impact  on  property  prices,  remaining  overall  still  low.  Instead,  a  more  meaningful  change  in  the 
design  of  the  tax,  for  example  based  on  updated  property  values  in  order  to  allow  a  targeted 
impact on the property prices, does not seem to be on the political agenda for the moment.    

Inflationary  pressures  were  affected  by  monetary  policy  adjustments.  The  CNB  has 
proactively raised the policy rate in response to rising inflation already in the second half of 2021 
and policy rates were increased at a relatively fast pace to attain 7% in June 2022. However, since 
then  the  policy  rates  remained  unchanged  despite  continuing  inflation  pressures.  The  CNB 
intervened several times in the exchange rate market in 2022 (selling reserves of around 700 bn. 
CZK) to prevent depreciation pressures of the koruna. In 2023, the koruna appreciated which has 
significantly limited the imported inflation related to the increase of energy prices. While inflation 
seems  to  be  on  a  declining  path  after  the  high  levels  in  the  past  year,  a  tight  monetary  policy 
stance is needed to keep inflation expectations anchored and avoid a negative impact also on the 
competitiveness of the country. (9) 

Government  support measures  helped  households and businesses  cope with  the  energy 
crisis and contain inflation and thus lowered pressures on price competitiveness. With the 
unfolding  of  the  energy  crisis  in  2022,  the  Czech  government  took  several  measures  that 
contributed to lowering inflation with positive impact on the competitiveness of Czech businesses. 
During  2022,  several  energy  support  measures (10)  reduced  household’s  and  companies’  energy 
bills,  thus  having  a  direct  impact  on  inflation  for  the  last  quarter  of  2022  but  also  lowering 
secondary round inflationary effects by containing producers’ prices increases. Additionally, caps on 
electricity  and  gas  prices have  been  legislated  for  2023. (11)  The  caps  should  contribute to  lower 
inflation expectations in the economy for 2023 and indirectly help to reduce growth pressures on 
salaries  and  nominal  ULC growth.  While  the  caps  are  mostly  untargeted,  the  relatively  high  price 
level at which they are set also helps preserve end users’ incentives to save energy. The caps are 
also financed by levies on revenues above a certain level and surplus profits of energy producers, 
thus  reducing  the  negative  impact  on  the  government  budget.  While  the  energy  prices  are  on  a 
downward path, maintaining the framework for further support in place for targeted interventions 
is essential in assuring that energy inflation does not again spike out of control.  

(9)  IMF  (2023):  2022  Article  IV  Consultation  –  Press  Release,  and  Staff  Report,  January  2023  concluded  about  monetary 
policy: “While a careful tread between high inflation and weakening economic activity is needed, priority should be given to 
decisively quelling inflation. Staff recommends further hikes to the policy rate in the short term, to bring down high inflation 
and  to  ensure  fulfillment  of  the  inflation  target  over  the  medium  term,  while  reducing  the  risk  of  inflation  expectations 
becoming untethered.” 

(10)  The measures included  a lump sum contribution to the energy bills of households (“savings tariff”)  in the last quarter of 
2022,  lowering  the  end-users  contribution  to  the  renewables  support  scheme,  lowering  excises  for  fuel  or  support  for 
operating losses of industry affected by high energy prices.  

(11)  The  Czech  government  approved  price  caps  at  EUR  200  per  MWh  excluding  VAT  for  electricity  and  EUR  100  per  MWh 
excluding  VAT  for  gas  for  small  consumers  and  further  extended  the  scheme  to  industrial  companies  starting  January 
2023, with the difference between market prices and cap levels to be compensated from the state budget. 

11 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

An alignment of the fiscal policy with the monetary policy is needed in order to contain 
inflationary pressure. A loose fiscal policy over the past 3 years was partly justified by the need 
to react to the COVID and the energy crisis and led to the budget deficit reaching a high 5.8% of 
GDP in 2020 before starting to decline to 3.6% in 2022. The pace of public debt increase has also 
been high, with public debt-to-GDP reaching 44.1% in 2022 compared to 30.0% in 2019. A gradual 
return  to  a  sustainable  fiscal  path is  necessary to  ensure  debt  sustainability, but  also  to prevent 
fiscal policy to again fuel inflation growth inducing further loss of price competitiveness. According 
to  the  Commission  Spring  2023  forecast,  the  overall  fiscal  stance  is  likely  to  turn  contractionary 
already  in  2023  and  2024,  as  the  government  took  measures  to  limit  the  growth  of  public 
expenditures  (e.g.  social  spending  on  pensions,  salaries  of  public  employees)  below  nominal  GDP 
growth  and  the  energy  support  measures  begin  to  be  phased-out.  Still  risks  remain  to  potential 
further  growth  in  expenditures.  The  government  has  announced  its  intention  to  propose  a  fiscal 
consolidation plan of at least 1pp of GDP for 2024 but the details have not yet been established. 
To  prevent  further  upwards  pressure  on  inflation,  the  fiscal  policy  should  be  aligned  with  the 
monetary  policy  in  reducing  the  overall  demand  impulse  while  only  providing  targeted  support  if 
required by the energy situation.  

Policy needs to address the structural tightness of the labour market to stem excessive 
wage  growth.  Labour  supply  has  been  structurally  insufficient,  which  applies  to  broad  range  of 
occupations, and adds upward pressure on wage growth. The Czech government has recently taken 
steps  to  facilitate  labour  migration  from  non-EU  countries  (such  as  Armenia,  Georgia  and  North 
Macedonia)  to  address  some  of  the  labour  and  skills  shortages.  Still,  further  efforts  are  needed 
including  measures  to  raise  the  labour  market  participation  of  women  (in  particular  those  with 
small children), disadvantaged groups such as persons with disabilities, low-skilled, older workers, 
and long-term unemployed persons and strengthening the upskilling and reskilling of working age 
population.  

Improving  non-price  competitiveness  and  promoting  productivity  growth  can  help 
countering the losses in cost competitiveness. There is room to further step up performance 
in  terms  of  research,  development  and  innovation,  including  by  strengthening  education  and 
training  systems.  This  could  help  Czechia  to  fulfil  its  ambition  to  shift  to  higher  value-added 
positions  in  the  supply  chain,  as  described  in  several  strategic  documents  related  to  education, 
research,  development  and  innovation.  Czechia’s  strong  industrial  sector  has  the  potential  to 
develop  innovative  green  technology  solutions.  This  could  lead  to  the  creation  of  new  industries, 
products,  and  services  strengthening  the  country’s  competitiveness.  However,  the  impact  of  the 
green  transition  on  the  Czech  competitiveness  will  depend  on  several  factors,  including  the 
country’s ability to innovate and adapt to new technologies and more effective energy sources. 

There is scope to reduce the administrative burden on start-ups and to lower the cost of 
resolving insolvencies. A business-friendly climate that eases the entry and exit of low- and high 
emission firms can aid in the diffusion of new green technologies. Effective insolvency procedures 
are crucial to minimise barriers to corporate restructuring and spur productivity-enhancing capital 
reallocation. Still, the cost of resolving insolvencies is too high in Czechia and need to be lowered to 
allow for creative destruction, boost green investment and allow new innovative firms to bring low-
carbon  technologies  to  the  market  while  inefficient  high-carbon  firms  exit.  Higher  carbon  prices 
increase the costs for domestic firms, raising concerns about international competitiveness. Czech 
firms and households seem highly concerned about external competitiveness in relation to climate 
policies. 

12 

2. 

Assessment of macroeconomic vulnerabilities 

Conclusions 

In  Czechia,  vulnerabilities  relating  to  competitiveness  and  house  price  developments 
have been increasing. The Czech economy was strongly hit by the energy price shock. While still 
facing  elevated  price  pressures  and  related  secondary  effects,  Czechia’s  price  competitiveness  is 
projected  to  partially  recover  going  forward  amid  decreasing  energy  prices,  without  immediate 
external  sustainability  challenges.  Nevertheless,  the  recent  deterioration  of  the  trade  and  the 
current  account  balance  warrant  close  monitoring  going  forward.  While  demand  for  housing 
increased  strongly  in  the  past  amid  low  interest  rates,  high  disposable  income  and  insufficient 
macroprudential measures, the supply of housing did not match this increase. House prices started 
to increased strongly during the pandemic times but in the second half of 2022 they went into a 
period of moderation, given higher interest rates and stricter lending conditions. As yet, risks of a 
significant house price corrections are considered to be  very low, and household debt is also low 
and  the  banking  sector  is  sound.  A  remaining  concern  related  to  competitiveness  is  whether 
inflation will revert swiftly to historical  averages or rather prove sticky for an extended period of 
time which could carry risks for Czechia’s cost competitiveness going forward. 

Continued  efforts  are  needed  to  provide  a  policy  environment  conducive  to  reining  in 
price growth. Bringing consumer, output and asset inflation rates down to the EU average quickly 
requires a strong deceleration in demand growth, which in turn can be achieved by sufficiently tight 
monetary  and  fiscal  policy.  While  the  fiscal  stance  is  already  expected  to  turn  contractionary  in 
2023  and  2024,  amid  a  gradual  phase-out  of  energy  support  measures,  risks  remain  of  further 
slippages  due  to  inflationary  pressures  on  the  budget  expenditures.  Further  fiscal  consolidation 
efforts  are  needed  to  ensure  a  permanent  reduction  in  the  structural  deficit  (by  containing 
expenditures  growth  or  broadening  the  taxation  base  including  property  taxation)  and  to  ensure 
that the fiscal policy is not further fuelling inflation and a loss of price competitiveness.  Improving 
non-price competitiveness and promoting productivity growth can help countering the losses in cost 
competitiveness. There is scope to reduce the administrative burden on start-ups and to lower the 
cost of resolving insolvencies.      

Based on the findings in this in-depth review, the Communication “European Semester – 
2023  Spring  Package”  sets  out  the  Commission’s  assessment  as  to  the  existence  of 
imbalances or excessive imbalances in Czechia, in line with Regulation 1176/2011. (12) 

(12) European Commission (2023), European Semester Spring Package 2023, COM(2023) 600 final. 

13 

                                                 
Graph 2.1: Selected graphs, Czechia 

2. 

Assessment of macroeconomic vulnerabilities 

Source: Eurostat, ECB, Comext and European Commission services 

14 

-2024681012141618201920212223% growth year on yearData up to 2023M03 a) Core inflation CZEA19951001051101151201251301819202122b) Real effective exchange ratevs. 42 partners, based on headline inflationvs. EA19, based on headline inflationvs. EA19, based on core inflationvs. 42 partners, based on core inflation-6-4-2024681012140708091011121314151617181920212223*24*Rate of change y-o-y (%)c) Decomposition of rate of change of ULCInflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal unit labour costULC in EU27CZEA19-50510152025301819202122% growth year on yeare) House price growth CZEA200246810121920212223%f) Av. Interest rate for new hh. Mortgage business-10-5051018192021222324% of GDPd) Trade balanceimpact from non-energy terms of tradenon-energy G&S trade bal in 2015 pricesEnergy price impactEnergy trade bal in 2015 pricesG&S trade balanceforecast     
 
Graph 2.2: HICP differentials 

2. 

Assessment of macroeconomic vulnerabilities 

Source: European Commission services 

15 

-4-202468101201/01/200101/10/200101/07/200201/04/200301/01/200401/10/200401/07/200501/04/200601/01/200701/10/200701/07/200801/04/200901/01/201001/10/201001/07/201101/04/201201/01/201301/10/201301/07/201401/04/201501/01/201601/10/201601/07/201701/04/201801/01/201901/10/201901/07/202001/04/202101/01/202201/10/2022IR DifferentialHICP Differential   
 
 
 
2. 

Assessment of macroeconomic vulnerabilities 

Box 1: Inflation exposures and cross-border pass-through 

This  box  sheds  light  on  the  sources  of  inflation  in  Czechia  and  its  spill-overs  with  EU 
partners.  The  period  since  2021  has  been  characterized  by  pandemic  aftershocks  and  global 
supply  chain  disruptions  compounding  global  inflationary  pressures  and  a  surge  in  commodity 
prices  triggered  by  Russia’s  war  of  aggression  against  Ukraine.  As  a  result,  inflation  in  Czechia 
surged to unprecedented levels. In response, wages and profits also picked up across the EU, which 
further  added  to  price  pressures  in  Czechia.  With  input-output  data,  domestic  inflation  can  be 
decomposed  into  the  contributions  from  key  cost  factors.  Taking  into  account  some  data 
limitations, the framework can be  used to attribute consumer and investment price changes to i) 
extra-EU import price changes, which include both directly imported inflation and inflation passed 
through from EU partners import costs ii) domestic unit labour cost changes iii) domestic unit profit 
changes, including indirect taxation changes and iv) rest-of-EU value added price changes. (13) 

Data  suggests  that  inflation  in  Czechia  was  sustained  by  both  domestic  and  external 
drivers in 2022, whereas the importance of domestic drivers is expected to increase in 
2023.  In  2022,  as  shown  in  Graph  2.3,  energy  prices  contributed  markedly  to  consumer  and 
investment inflation. Spill-overs, particularly in the form of import cost pass-through, from other EU 
countries  contributed  mildly.  Domestic  value  added  inflation  contributed  substantially.  Consumer 
and  investment  inflation  is  expected  to  subside  somewhat  this  year  amid  decline  of  imported 
inflation  component.  Energy  inflation  is  set  to  lower  inflation.  By  contrast,  domestic  value  added 
inflation,  particularly  unit  profits,  is  expected  to  keep  inflation  elevated.  In  2024,  consumer  and 
investment inflation is projected to fall further, still sustained by domestic wages and profits. 

Graph 2.3: Components of gross fixed capital formation deflator growth and consumer price 
inflation 

Source: European Commission services 

(13) The graphs below are based on national accounts data and the Commission’s Spring 2023 forecast, which are combined 

through a ‘Ghosh’ matrix based on Eurostat’s Figaro input-output available for 2015-2020. HICP is taken as the measure of 
the price of private consumption, including non-residents. Energy import prices from extra-EU reflect realised median prices 
until 2022, and energy price assumptions underlying the Spring forecast thereafter. Other goods prices reflect median 
Eureopan prices per industry until 2022, and forecast non-energy goods and service trade prices for 2023-2024. Value added 
deflators are assumed to affect all industries within a country to the same degree. Changes in import prices and value added 
deflators are assumed to affect demand prices with a delay of 5 months for consumption inflation and no delay for 
investment inflation. For a similar analysis using an input-output-based methodology, see “Inflation Differentials in Europe 
and Implications for Competitiveness: Thematic Note to Support In-Depth Reviews” European Commission 2023, Institutional 
paper 198. 

16 

-4-20246810161718192021222324% change (year-on-year)CZ: contribution to domestic GFCF deflator growth-505101520161718192021222324% change (year-on-year)CZ: contribution to domestic CPI deflator growthDomestic ULCUnit profits (&taxes)RoEU value added deflatorEnergy imports from Extra-EUOther imports from Extra-EURoEU import cost passthr.ResidualDeflator growth YoY 
  
 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Table 2.1: Selected economic and financial indicators (Part 1), Czechia 

(e) estimate based on ECB quarterly data 
(1) Potential output is the highest level of production that an economy can reach without generating inflationary 
pressures. The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. 
Raciborski, W. Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating 
Potential Growth Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014. 
(2) Deviation of actual output from potential output as % of potential GDP. 
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors 
and global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account 
benchmarks", European Economy, Discussion Paper 86/2018, for details.  
(4) This benchmark is defined as the average current account required to halve the gap between the NIIP and the 
indicative MIP benchmark of -35% of GDP over the next ten years, or to stabilise the NIIP at the current level if it is 
already above the indicative MIP benchmark. Calculations make use of Commission’s T+10 projections. 
(5) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment 
(FDI) equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding 
instruments that cannot be subject to default. 
(6) Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and 
taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the 
probability of a banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. 
Methodology to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., 
Turrini, A., Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42. 
Source:  Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring 
forecast 2023) 

17 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Real GDP 5.50.23.13.0-5.53.62.50.22.6Potential growth  (1)4.21.72.42.61.40.52.11.51.6Contribution to GDP growth:Domestic demand 4.0-0.32.83.3-4.22.41.30.12.5Inventories 0.4-0.40.2-0.3-0.94.81.0-0.3-0.2Net exports 1.11.00.10.0-0.4-3.60.20.40.2Contribution to potential GDP growth (1):Total Labour (hours) 0.3-0.10.60.3-0.2-0.71.00.50.4Capital accumulation 1.00.80.60.90.60.60.70.70.7Total factor productivity 2.91.01.21.41.00.60.40.30.4Output gap (2)2.8-0.1-0.22.7-4.3-1.4-1.1-2.3-1.3Unemployment rate7.36.44.62.02.62.82.22.82.6Harmonised index of consumer prices (HICP)1.82.71.22.63.33.314.811.93.4GDP deflator 1.90.92.13.94.33.38.611.35.5External positionCurrent account balance (% of GDP), balance of payments-3.7-2.30.60.32.0-2.8-6.1-3.2-1.3Trade balance (% of GDP), balance of payments1.03.56.56.06.72.8-0.1..Primary income balance (% of GDP)-4.5-5.3-5.4-5.0-4.2-5.1-5.5..Secondary income balance (% of GDP)-0.2-0.4-0.4-0.6-0.5-0.5-0.5..Current account explained by fundamentals (CA norm, % of GDP) (3)-0.40.10.40.70.80.70.91.01.1Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)-1.2-2.3-3.0-2.4-2.3-2.1-2.2-2.1-1.9Capital account balance (% of GDP)0.20.91.20.41.21.70.1..Net international investment position (% of GDP)-25.9-43.5-31.1-19.8-16.3-14.5-19.7..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5)17.88.622.730.237.336.928.3..Net FDI flows (% of GDP)-4.2-1.7-1.1-2.4-2.6-0.5-2.5..CompetitivenessUnit labour costs (ULC, whole economy)1.72.12.84.37.31.84.87.84.4Nominal compensation per employee 6.32.54.17.23.15.05.57.36.6Labour productivity (real, hours worked)5.00.31.82.72.40.4-1.1-1.31.1Real effective exchange rate (ULC)2.62.0-0.41.7-0.14.85.56.00.9Real effective exchange rate (HICP)2.22.4-0.50.60.33.89.7..Export performance vs. advanced countries (% change over 5 years)66.429.72.23.18.73.8...Private sector debtPrivate sector debt, consolidated (% of GDP)55.377.581.678.681.778.875.1..Household debt, consolidated (% of GDP)16.828.631.031.533.934.432.5..Household  debt, fundamental benchmark (% of GDP) (6)26.637.643.242.846.446.346.0..Household  debt, prudential threshold (% of GDP) (6)75.187.159.457.956.155.052.9..Non-financial corporate debt, consolidated (% of GDP)38.648.950.647.147.744.442.5..Corporate debt, fundamental benchmark (% of GDP) (6)53.158.563.760.464.263.161.6..Corporate debt, prudential threshold (% of GDP) (6)88.4103.773.371.574.075.673.4..Private credit flow, consolidated (% of GDP) 5.84.34.21.40.62.94.9e..Corporations, net lending (+) or net borrowing (-) (% of GDP)-2.1-0.9-1.1-2.81.4-2.0-5.1-1.01.1Households, net lending (+) or net borrowing (-) (% of GDP)1.11.91.92.16.26.24.73.22.3Net savings rate of households (% of net disposable income)7.07.46.98.514.714.8...forecast 
 
 
   
 
 
 
 
Table 2.2: Selected economic and financial indicators, Czechia 

2. 

Assessment of macroeconomic vulnerabilities 

(1) (7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is 
estimated in a cointegration framework using a system of five fundamental variables; total population, real housing 
stock, real disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, 
based on Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - 
Discussion Papers 2015 - 048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. 
Price-to-income and price-to-rent gaps are measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

18 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Housing marketHouse price index, nominal7.61.05.69.28.519.716.9..House price index, deflated5.6-0.94.46.25.416.40.8..Overvaluation gap (%) (7)-2.0-0.2-6.65.08.922.935.0..Price-to-income overvaluation gap  (%) (8)-6.3-0.1-2.07.614.127.334.2..Residential investment (% of GDP)4.44.44.04.44.64.74.8..Government debtGeneral government balance (% of GDP)-3.0-3.6-0.10.3-5.8-5.1-3.6-3.6-3.0General government gross debt (% of GDP)27.836.538.130.037.742.044.142.943.1Banking sectorReturn on equity (%)14.611.78.412.58.012.1...Common Equity Tier 1 ratio22.117.416.520.622.818.8...Gross non-performing debt (% of total debt instruments and total loans and advances) (9)..2.61.51.61.4...Gross non-performing loans (% of gross loans) (9)..3.01.71.91.71.4..Cost of borrowing for corporations (%)..3.33.61.94.5...Cost of borrowing for households for house purchase (%)..2.72.52.12.94.9..forecast