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Country Forecast Czech Republic March 2018 Updater

Country Forecast Czech Republic March 2018 Updater

  • March 2018
  • ID: 5355265
  • 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). Mr Babis is struggling to build support for an ANO-led government given concerns in the other parties about the legality of his business affairs. However, The Economist Intelligence Unit expects him to win a parliamentary vote of confidence on his second attempt, resulting in a minority government, either alone or in coalition with the Czech Social Democratic Party (CSSD).
  • We expect a significant degree of policy continuity. Despite Mr Babis's populist style, ANO is primarily technocratic and pro-business, with no particular ideological slant. We expect continued efforts to reduce tax evasion, increase transparency in public procurement and streamline the state apparatus. Foreign policy will remain pro-EU, despite tensions over migrant relocation plans.
  • We estimate a 0.7% of GDP budget surplus in 2017, as strong employment and wage growth supported tax revenue and administrative bottlenecks held back capital spending. We expect a gradual decline in the surplus in 2018-19 and a return to small deficits-albeit well within 1% of GDP-in 2020-22.
  • Real GDP growth accelerated to 4.4% in 2017, from 2.5% in 2016. We forecast 3.3% growth in 2018, driven primarily by household consumption (the result of a tight labour market and strong wage growth), strong public and private investment spending, and robust external demand. In 2019-22 we forecast annual average growth of 2.5% as the economy eases back to its potential rate.
  • 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, owing to the exit from the bloc of the UK, a major contributor to the EU budget.
  • We forecast 2.3% 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 Kc27:EUR1 ceiling on the value of the koruna was lifted in April 2017. The currency 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 our forecast period (2018-22).


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