I see a psychological break, says the economist about Czech spending

People have started spending more after many months and the economic mood in the country is slowly starting to recover. It can also be seen in the significant increase in confidence in further development. Is the worst really behind us? And will they continue to make food cheaper?

Guest I’m asking he was an economic adviser to the prime minister and chief economist at BH Securities Štěpán Křeček.

The Czech economy is finally beginning to revive after many months of pessimistic development. The mood of households and companies started to turn for the better in March and they are once again more willing to spend. This is indicated by the data of the Czech Statistical Office (ČSÚ), according to which, after two months of decline, confidence in the Czech economy rose in March and is the highest since last May. While businessmen are more cautious, the confidence of consumers themselves has increased for the third month in a row.

“We are here (in I ask, note ed.) talked about it at the end of last year, and then many people blamed me for being too optimistic. Now it turns out that I was not an optimist, but a realist. When I talked about beating inflation, it happened, inflation is back on target (at two percent, note ed.),” declared economist Štěpán Křeček.

And he pointed out that food prices in the Czech Republic are falling the fastest in the entire European Union. “It can be expected that we will continue to maintain our leadership in this regard, food prices should still decrease slightly. Everyone who is preparing for Easter has noticed in the shops that, for example, the prices of eggs have dropped significantly, flour, dairy products… so even ordinary people will feel it.”

What will Czechs spend the most on now? Isn’t it a mistake when the Minister of Labor and Social Affairs started backing away from the dismissal without giving a reason? And what more fundamental reform steps will the government still manage?

You can play the entire interview in an audio player, in your favorite podcast app or in a video.

What was said in the conversation?

1:00 How would you describe the current state of the Czech economy? – We are here (in I ask, note ed.) talked about it at the end of last year, and then many people blamed me for being too optimistic. I am glad that now it turns out that I was not an optimist, but a realist. That when I talked about beating inflation, it happened, inflation is back on target. The price of electricity on the stock exchange is three times lower than when the government took over after Andrej Babiš.

2:00 a.m At the same time, we see that the economy is slowly getting started. After a year and a half, merchant sales have finally started to grow and overall I would say that the mood is starting to improve. Real wages will rise this year, so I believe that people will also have a higher standard of living and the mood will continue to improve.

3:00 a.m Next year at the latest, economic growth will be even stronger than this year. And since we have beaten inflation and we continue to see tension in the labor market, it is obvious that real wages will rise.

4:00 And what about food prices? – At the moment, food prices in the Czech Republic are falling the fastest of all European Union countries, already since December, so a quarter of the year – December, January, February. And it can be expected that we will continue to maintain our leadership in this regard. So food prices should still be slightly cheaper. And I think that everyone who is already preparing for Easter has noticed in the shops that, for example, the prices of eggs, flour, dairy products have dropped significantly, so even ordinary people will feel it.

6:00 And what about prices in services, is there any sign of improvement? – You are right that here we see a big difference in the development of products and services. While we are even talking about discounting for many products, there is actually deflation in many product ranges, so inflationary pressures are relatively strong for those services. Together, products and services therefore come out exactly above the target, at the moment at two percent. But it does not mean that we should win in everything. And we have to focus on those services.

7:00 a.m It turns out that many people may have changed their preferences a little due to covid, they focus more not on consumption, but on experiences. Demand for services is very strong. People, even when it wasn’t the easiest of times economically, often bought up all the vacations and so on. After all, with those services, we also have a relationship with the specific person from whom we draw the service. For example, to your hairdresser. And even if the hairdresser continues to raise prices, we won’t just replace him.

7:45 am Residents’ incomes are increasing, pensions were further valued in January, wages are rising, so real wages will rise this year. So the fact that there are some items that actually have to be equalized in order to equalize the relative prices between services and products, that’s just a fact. – How long will service prices rise? – Equalization will take place during this year, so next year we will no longer deal with this problem.

8:00 And where would you expect the greatest inflationary pressures in services? – Czech preferences are changing. It is obvious that after the series of negative news that we have experienced here for years – it started with the pandemic, it continued with the energy crisis, the war in Ukraine, the inflationary episode – the most focused is on the experiences. And they are no longer willing to deny themselves anything. Perhaps many have discovered that if they keep denying themselves something, they may never get it in the end. So I see a psychological break in it.

8:40 a.m Abroad, we often see that those services, specifically in Germany, have a completely different price level. So here we are catching up a bit with what is usual in the West.

9:00 And does it continue or is there still a trend of going shopping abroad, especially to Poland, which you yourself were a big promoter of? – So that’s something that made me famous. If any verbal intervention really helped tame that inflation, it was this one. If people still accepted those exorbitant prices, merchants wouldn’t start discounting. The fact that people showed the traders that they also had options elsewhere forced the traders to discount it.

9:30 a.m Shopping in Poland is no longer worthwhile. Those price levels level off a lot. Of course, if someone lives in Český Těšín, they might still jump into Poland. There, for example, cigarettes are worthwhile, but for people from far away to go shopping in Poland is no longer worthwhile, it is no longer reasonable.

12:00 From your point of view, is it appropriate for the Czech National Bank to speed up the reduction of interest rates, or do you think the gradual pace set by the bankers is fine? – From the beginning, I defended the new banking board’s course of action, and it was very unpopular, but I did it anyway, when we embarked on the path of interest rate stability. And after we won the fight against inflation, we started lowering those interest rates.

1:00 p.m That is the better solution, the one we chose, because the cost to the whole economy would be enormous. I think it was okay. Nevertheless, we managed to beat inflation very quickly, but now it is necessary to continue this regime in order to reduce the interest rate carefully, gradually.

15:00 How will it be with the availability of housing? Will the government get more involved? According to experts, this is one of the essential ways to secure oneself in old age. – I think it is an extremely burning question from all possible points of view. I am convinced that the best possible insurance for old age is the acquisition of your own real estate. And now we are preventing this from the younger generation. I am convinced that this is primarily due to insufficient construction. All kinds of regulations prevent us from doing so. If we face the truth, in short, the fact that permit processes last for example ten years in Prague makes the apartment extremely expensive.

18:00 Interest rate cuts themselves are double-edged. Mortgages will increase the demand for the purchase of housing, the high demand will meet the limited supply and, in turn, the real estate prices will increase significantly. So housing availability will drop again. It’s just not a long-term solution. We need more construction.

18:30 How do you rate the Polish idea of ​​subsidizing mortgages? – It’s nonsense. I am radically against it. We cannot interfere in the market like this.

I am asking, Marie Bastlová