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Country Forecast Czech Republic July 2018 Updater

Country Forecast Czech Republic July 2018 Updater

  • July 2018
  • ID: 4979517
  • Format: PDF
  • By The Economist Intelligence Unit

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  • In the October 2017 election the centrist ANO movement, led by Andrej Babis, won 78 out of 200 seats in the Chamber of Deputies (the lower house of parliament). The Economist Intelligence Unit expects a minority coalition with the Czech Social Democratic Party (CSSD) to be confirmed in office in July.
  • The government will rely on a tolerance agreement with the Communist Party of Bohemia and Moravia (KSCM) to pass legislation. Relations between coalition partners are likely to be strained, and tensions may worsen over an ongoing criminal investigation into the legality of Mr Babis's business affairs.
  • We do not expect the government to last its full term. However, political instability is unlikely to affect the broad direction of policy, which will remain fiscally prudent and pro-business. Foreign policy will remain strongly pro-EU, but clashes over the bloc's asylum and immigration policies have yet to be resolved.
  • After two years of budget surpluses, the government will enable some fiscal loosening, resulting in a gradual decline in the fiscal surplus and a return to deficit over our forecast period (2018-22). Public debt is comparatively low as a share of GDP already, and will fall below 30% of GDP in 2020.
  • Real GDP growth accelerated to 4.5% in 2017. We forecast a 3.5% expansion in 2018 as supply-side constraints-especially in the labour market-start to hold back growth. Our expectation that the US will escalate its trade dispute with the EU and increase tariffs on automotive imports will affect the Czech Republic (mostly via Germany) in 2019, when we expect real GDP growth to slow to 2.9%.
  • In the longer term, income convergence will further reduce the unit labour cost differential with western Europe, eroding cost advantages for exporters and prompting greater policy-led efforts to attract investment into high value-added industrial sectors. Less EU funding will be available in the 2021-27 fiscal period.
  • We forecast 1.9% average annual inflation in 2018, driven by a positive output gap and intensifying labour shortages on the demand side, and higher oil prices on the supply side. However, price growth will be kept in check by monetary tightening and an appreciating koruna. We expect the Czech National Bank (CNB, the central bank) to maintain its tightening cycle through to 2019.
  • The koruna is appreciating against the euro, and we expect this trend to continue over the medium term, given robust economic growth and rising interest rates. We do not expect the Czech Republic to adopt the euro in the forecast period.


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