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Czech Republic Business Forecast Report Q4 2014

  • September 2014
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views
We have revised down our forecast for inflation in the Czech Republic,
and readjusted our expectation for monetary policy trajectory. We
now expect the Czech National Bank to target a weaker koruna in
the coming months, as deflationary risks mount and ECB easing
looms over the horizon.
The ongoing debate in the Czech Republic over civil service reform
will result in only modest modifications to the status quo by end-2014.
This will darken public perceptions of the government’s ability and
willingness to address structural deficiencies of the state administration.
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 latest revision of the Q114
real GDP growth print, we have revised upward our forecast to 2.4%
from 1.8% previously. Nevertheless, we reiterate our expectation for
the momentum behind the export-led recovery in the Czech Republic
will abate somewhat in H214, on the back of a slowdown in German
export growth.

Table Of Contents

Czech Republic Business Forecast Report Q4 2014
Executive Summary. 5
Core Views..5
Major Forecast Changes5
Key Risk To Outlook..5
Chapter 1: Political Outlook. 7
SWOT Analysis.. 7
BMI Political Risk Ratings 7
Domestic Politics.. 8
Government Not Delivering On Anti-Corruption Promises Yet..8
The ongoing debate in the Czech Republic over civil service reform will result in only modest modifications to the status quo by end-
2014. This will darken public perceptions of the government's ability and willingness to address structural deficiencies of the state
administration.
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 15
SWOT Analysis 15
BMI Economic Risk Ratings... 15
Economic Activity... 16
Momentum Behind Export-Led Recovery Topping Out.16
We have revised slightly upward our real GDP growth forecast for 2014 to 2.4% from 1.8% previously, on the back of the export sector
performing better than we envisioned in the first half of the year. Nevertheless, we retain our view that the momentum behind the exportled
recovery will wane in H214, as external demand suffers from tepid eurozone growth.
TABLE: Economic Activity..16
Fiscal Policy. 17
Sustainable Expansionary Fiscal Trajectory Ahead..17
Czech Prime Minister Bohuslav Sobotka's fiscal trajectory will represent a reversal of the previous administration's focus on austerity.
Nevertheless, fiscal sustainability will remain in place and we forecast limited budget deficits below 3% of GDP for the foreseeable
future.
TABLE: Fiscal Policy17
Monetary Policy... 18
Koruna Cap Shift Likely In Coming Months...18
We have revised down our forecast for inflation in the Czech Republic, and readjusted our expectation for monetary policy trajectory.
We now expect the Czech National Bank to target a weaker koruna in the coming months, as deflationary risks mount and ECB easing
looms over the horizon.
TABLE: Monetary Policy19
Balance Of Payments.. 19
Safe Haven Status To Ensure Financing Of Modest Current Account Deficits...19
We forecast the Czech Republic to register a current account deficit of 1.7% of GDP in 2014 and 2.4% in 2015, and we expect modest
current account shortfalls for the foreseeable future. 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.
TABLE: Current Account...20
Chapter 3: 10-Year Forecast... 23
The Czech Economy To 2023. 23
Effective Convergence.23
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 Forecasts23
Chapter 4: Business Environment. 25
SWOT Analysis 25
BMI Business Environment Risk Ratings.. 25
Business Environment Outlook. 26
Institutions... 26
TABLE: BMI BUSINES AND OPERATION RISK RATINGS26
TABLE: BMI LEGAL FRAMEWORK RATING.27
TABLE: LABOUR FORCE QUALITY..28
Infrastructure... 29
TABLE: EMERGING EUROPE - ANUAL FDI INFLOWS.29
TABLE: TRADE AND INVESTMENT RATINGS.30
Market Orientation... 31
Operational Risk.. 31
Chapter 5: Key Sectors.. 33
Pharmaceuticals and Healthcare... 33
TABLE: Pharmaceutical Sales, Historical Data And Forecasts ...35
TABLE: Healthcare Expenditure Trends, Historical Data And Forecasts 36
TABLE: Government Healthcare Expenditure Trends, Historical Data And Forecasts. 37
TABLE: Private Healthcare Expenditure Trends, Historical Data And Forecasts... 37
Telecommunications... 38
TABLE: Telecoms Sector - Mobile - Historical Data and Forecasts 40
Other Key Sectors... 41
TABLE: Food and Drink Sector Key Indicators.41
TABLE: Autos Sector Key Indicators...41
TABLE: Defence and Security Sector Key Indicators...41
TABLE: Oil and Gas Sector Key Indicators.42
TABLE: Infrastructure Sector Key Indicators...42
TABLE: Freight Key Indicators42
Chapter 6: BMI Global Assumptions. 43
Global Outlook. 43
Eurozone Downgrade On Poor Q214..43
Table: Global Assumptions.43
Table: Developed States, Real GDP GrowtH, %...44
Table: BMI VERSUS BLOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %. 44
Table: Emerging Markets, Real GDP Growth, %..45

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