High inflation weighed most heavily on Czech consumption

High inflation is biting into real household incomes across Europe, but differences in the intensity of the impact remain high, even within the CEE region. While Czech household consumption has fallen for the fifth quarter in a row and is almost 8% below pre-pandemic 2019 levels, in Hungary real consumption growth has only stalled in the last two quarters and is still more than 8% above pre-pandemic 2019 levels. In Poland, consumption has started to fall rapidly in the last two quarters, but is still approximately 3% above 2019 levels (see figure CEE1). Where do such significant differences come from and are they sustainable in the long term?

The main difference lies in the more pronounced decline in real incomes in the Czech Republic. So far, the energy crisis seems to have bitten into the real incomes of Czech households more than in the rest of the region. While the regional differences in inflation dynamics were not so significant in 2023 (13-16% HICP), the wage dynamics differed more significantly. While nominal wages grew at a double-digit rate in Poland and especially in Hungary, nominal wage dynamics visibly lagged behind in the Czech Republic (+6.5%). Real disposable income is therefore significantly lower than in the pre-Covid period in 2019, unlike in Poland and Hungary. However, further widening of the regional real income gap is unlikely. Rather, the gap may narrow in 2023, as we expect inflation to fade faster in the Czech Republic than in Poland, and Hungarian inflation even to accelerate further on average in 2023.

The second significant difference in Central Europe is the persistently higher savings rate of Czech households. Czech households, as has been shown in the past, are much more conservative and prefer to react to external shocks preemptively by accumulating precautionary savings. In recent years, household savings have risen sharply across the whole developed world in the wake of the COVID-19 pandemic. Households in Central Europe have also received substantial transfers from public budgets, often with nowhere to spend them. As a result, savings rates were in all Central European countries well above long-term averages. However, in response to the energy crisis and lower real incomes, Hungarian and Polish households have sharply reduced their savings rates, while the Czech one has remained well above the historical average (see figure CEE2). This gives Czech households much more room to stabilise real consumption over 2023.