Czech economists give mixed predictions on Ukraine-crisis impact

Russia’s invasion of Ukraine has plunged the Czech economy into uncertainty. Emergence from pandemic-related issues in 2021 previously promised a return to strong growth this year; but the war to the east has fundamentally changed economic forecasts.

In a new forecast for 2022 issued by the Czech Ministry of Finance today, it’s predicted that economic growth will slow to 1.2 percent this year. The economy grew by 3.3 percent in 2021, even though pandemic closures afflicted many businesses in the early part of the year.

It’s clear that the war in Ukraine promises an economic shock just as significant as that caused by Covid. And similarly to the pandemic, uncertainty about the future is causing major headaches.

One unknown factor is the level of inflation which can be expected this year. The Ministry of Finance currently predicts inflation to reach 12.3 percent, but economists have predicted figures of as high as 15 percent in recent weeks, and officials admit that accurate forecasts are difficult given the geopolitical situation.

“Current and future developments are burdened by extreme uncertainty stemming from the war in Ukraine. For example, average inflation, which we currently expect to grow by 12.3 percent this year, is extremely sensitive to hard-to-predict developments in energy prices. To illustrate: if volatile energy prices rise by about a fifth in the second half of the year, this would cause a one-percent increase in average inflation,” said Finance Minister Zbyněk Stanjura.

Extra tax revenues for the state budget generated by inflation, estimated at around CZK 6 billion, will be used “for additional budget expenditures, whether increased housing allowance, pension valorization, higher social benefits, defense expenditures, or the provision of accommodation, education and integration of refugees from Ukraine,” according to the Finance Ministry.

The crisis in Ukraine will drive up prices; and much of the extra income for the state driven by this inflation will go towards meeting emergency costs necessitated by the crisis. In this context, it's no surprise that economic growth will slow to a snail’s pace this year.

This will, according to the Ministry’s forecast, result in a “sharp rise in the cost of living” and lower living standards throughout the country.

Another problem facing the economy is a chronic imbalance in the labor market. New data from the Labor Office of the Czech Republic showed a fall in unemployment to 3.4 percent in March. Just under 253,000 people are now jobless, while more than 360,000 vacancies are open.

The labor shortage may be helped by the predicted arrival of tens or hundreds of thousands of Ukrainian refugees on the jobs market. Over 12,600 Ukrainian refugees have so far gained employment in Czechia, mostly in production, logistics or service industries. Another 8,400 are registered with job centers.

In its forecast for the coming year, the Ministry of Finance notes that the arrival of Ukrainian job seekers presents opportunities and risks. “On one hand, the influx of refugees from Ukraine could alleviate labor market imbalance and weaken the pressure on wage growth, but potentially failed integration could pose a significant social problem in the future.”

The reference to wage growth reflects underlying concern among economists that wage increases in line with the increased costs of living only entrench higher consumer prices. By increasing competition on the labor market, they reason, Ukrainians would help keep wages down.

This may be good for the country’s long-term economic health, but a lack of wage growth amid rocketing consumer prices promises significant short-term financial pain.

Czechs' everyday living costs are already among the worst in Europe, as shown by an analysis of European fuel prices by Mladá Fronta DNES, which found that gasoline in Czechia is currently more expensive, compared to wages, than anywhere else in Europe. Growth in fuel prices since the war in Ukraine began is meanwhile the second-fastest in the EU, behind only Poland.

The Czech opposition, led by Andrej Babiš, have proposed capping prices for some basic consumer goods. But the coalition government is strongly opposed to artificially capping prices, as it believes doing so only stores up problems down for the future.

This hands-off approach is intended to aid long-term economic health, but as the latest Czech economic figures demonstrate, hard times lie ahead in the short and medium-term. Uncertainty about the war in Ukraine and the resultant refugee crisis only heightens concerns for the future.