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Czech Republic Business Forecast Report Q3 2014

  • June 2014
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

Consumer price inflation in the Czech Republic accelerated to 0.4% y-o-y in May, from 0.1% in April, in line with our expectation that the economic rebound underway in Q114 should feed through to stronger inflationary pressures. Signs that the remaining slack in the labour market is declining and that demand-side inflationary pressures are now picking up are already evident in the May headline inflation outturn, as well as in wage growth, which accelerated markedly in Q114. We expect the ruling coalition in the Czech Republic comprising the centre-left CSSD and the populist ANO 11 party to remain stable for the duration of their term in power until 2018. However, declining support for the ruling CSSD party reflects a broad-based public disaffection with the political establishment as well as general suspicion towards the party’s pro-EU stance.

We reiterate our view that the country will continue to post modest current account deficits for the foreseeable future. The country’s status as a regional safe haven will ensure that stable financial inflows continue to cover the country’s external financing needs.


Major Forecast Changes

Following the Czech Statistical Office’s recent upward revision of the Q114 real GDP growth for the Czech Republic – to 2.5% from 2.1%, we have revised slightly upward our real GDP growth forecast – to 1.8% for 2014 from 1.6% previously. Nevertheless, we reiterate our view that growth will slow in H214, as we expect a slowdown in German export growth in H214 to chip away at the momentum behind the export-led recovery in the Czech Republic.

Table Of Contents

Czech Republic Business Forecast Report Q3 2014
Executive Summary. 5
Core Views..5
Major Forecast Changes5
Key Risks To Outlook5
Chapter 1: Political Outlook. 7
SWOT Analysis.. 7
BMI Political Risk Ratings 7
Domestic Politics . 8
Stability In Place Despite Waning Support For Ruling Party..8
We expect the ruling coalition in the Czech Republic comprising the centre-left CSSD and the populist ANO 11 party to remain stable
for the duration of their term in power until 2018. However, declining support for the ruling CSSD party reflects a broad-based public
disaffection with the political establishment as well as general suspicion towards the partys pro-EU stance.
Table: Political Overview..8
Long-Term Political Outlook 9
Further Western Integration Ahead..9
The Czech Republic will remain the most 'Western' of the CEE states over the next ten years, with per capita income set to reach the level
of poorer pre-2004 EU member states by the early 2020s. The country will face some key challenges, namely fiscal pressures from an
ageing population, relations between Czechs and immigrant minority groups, and potential ructions with Brussels. That said, the Czech
Republic will remain among the most politically, socially and economically stable countries in Europe through the next decade.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings... 13
Economic Activity... 14
Momentum Behind Export-Led Recovery To Wane...14
We have slightly revised upward our forecast for real GDP growth in the Czech Republic for 2014 - to 1.8% from 1.6% previously
due to a slightly more robust export-led recovery than we previously expected. Nevertheless, our forecast remains below Bloomberg
consensus for 2014, as we expect the momentum behind the rebound to lose some steam in H214.
table: Economic Activity..14
Monetary Policy... 15
No Further Easing In 2014...15
We maintain that inflation in the Czech Republic is already bottoming out and poised for gradual acceleration in H214. With inflation
likely to return back within the Czech National Bank (CNB)'s target and the economic recovery on track, we see no major incentives for
the CNB to ease further this year.
table: Monetary Policy ...15
table: Current Account...16
Balance Of Payments.. 17
Modest Current Account Deficits Ahead17
The Czech Republic will post modest current account deficits for the foreseeable future, as the country's trade surpluses will be offset
by its structural income deficits. We expect these shortfalls to be covered by ample financial account inflows as the country's safe haven
status will ensure high demand for Czech real and financial assets.
Fiscal Policy 18
Fiscal Sustainability In Place..18
In light of the new Czech government's plans to ramp up social spending, we expect the budget deficit to moderately expand in 2014-
2015 - to 1.5% of GDP and 1.7%, respectively, from 1.3% in 2013. We expect the government's budget deficits to remain below the EU
Fiscal Pact-mandated limit of 3.0% of GDP for the foreseeable future.
table: Fiscal Policy ...18
Chapter 3: 10-Year Forecast... 21
The Czech Economy To 2023. 21
Effective Convergence.21
The Czech Republic is forecast to remain a positive convergence story through the coming 10 years, despite the severe adverse
impact of the 2008-2009 global recession, with the eurozone accession policy anchor contributing to steady progress in a long-term
government reform agenda, despite a target for accession yet to be decided.
table: Long-Term Macroeconomic Forecasts21
Chapter 4: Business Environment. 23
SWOT Analysis 23
BMI Business Environment Risk Ratings.. 23
Business Environment Outlook. 24
Institutions... 24
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS24
TABLE: BMI LEGAL FRAMEWORK RATING.25
TABLE: LABOUR FORCE QUALITY..26
Infrastructure... 27
TABLE: EMERGING EUROPE - ANNUAL FDI INFLOWS.27
TABLE: TRADE AND INVESTMENT RATINGS.28
Market Orientation... 29
Operational Risk.. 30
Chapter 5: Key Sectors.. 31
Freight Transport. 31
tab le: Rai l Freight ..32
tab le: Road Freight ...32
tab le: Air Freight ...33
tab le: Inland Waterwa y Freight ...33
Water 34
table: Water Consumption, 2012-2018...36
table: Wastewater Treatment, 2012-2018...37
table: Water Sanitation, 2012-201838
Other Key Sectors... 39
table: Oil and Gas Sector Key Indicators.39
table: Food and Drink Sector Key Indicators.39
table: Defence and Security Sector Key Indicators...39
table: Telecoms Sector Key Indicators40
table: Infrastructure Sector Key Indicators...40
table: Autos Sector Key Indicators...40
Tab le: Phar ma Sector Key Indicators 40
Chapter 6: BMI Global Assumptions. 41
Global Outlook. 41
Emerging Market Deceleration41
Table: Global Assumptions.41
Tab le: Developed States , Rea l GDP Growt H, %...42
Tab le: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %. 42
Tab le: Emerging Markets , Rea l GDP Growth , %..43

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