Czech Republic Business Forecast Report Q2 2009

Publication Date	March 2009
Publisher	Business Monitor
Product Type	Report
Pages	68
ISBN Number	1745-0535
Product Code	BMI03515

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Summary

2009 Brings Sharp Recession

The Czech economy is set to enter recession in 2009, and we forecast full-year GDP growth of -2.1%. This is reflective of both external and domestic economic weakness. With the eurozone and other key trading partners all set for a period of economic contraction, we expect demand for Czech exports to fall and inflows of foreign capital to slow. Similarly, with credit conditions remaining tight, unemployment rising and wage growth stalling, domestic consumption and investment is also set to contract sharply, dragging overall GDP growth into negative territory. The result will be falling real incomes and painful downwards pressure on living standards. In turn, this worsening economic outlook will impact upon the Czech political climate. The centre-right Civic Democratic Party (ODS), which leads the ruling minority coalition, is likely to retain office until 2010, but it will remain unpopular and will struggle to push forward its pro-market reform agenda.

The Czech government will remain broadly committed to structural-economic reforms for the remainder of its term in office. However, the government's weakness - it rules as a minority, reliant on support from independent MPs, and scores poorly in public opinion polls - will hamper its ability to push forward these reforms, and raise the allure of fiscal populism. On the international front, Prague will continue to seek warm ties with both the EU and US. That said, we caution that there are now elevated risks to the progress of a missile defence radar deal with Washington, as the new US Administration has pledged to review the programme amid a drive to strengthen ties with the system's most strident critic, Russia. Moreover, the EU's Lisbon Treaty - which the government has reluctantly backed as the price to be paid for broader EU benefits - is likely to face a tough battle for ratification, after the Czech Senate postponed debate until April.

The expected 2.1% GDP contraction will take its toll throughout the Czech economy. We forecast the general budget deficit to soar to 5.2% of GDP in 2009, as falling profits and wages lead to a collapse in tax revenues. At the same time, rising demands for social transfer payments along with a modest fiscal stimulus package will push government spending higher. The recession bodes better for the country's external asymmetries, however, as falling imports amid weakening domestic demand and slowing capital goods inflows, along with reduced profit repatriation, will serve to shrink the current account deficit to 1.1% of GDP in 2009 from 3.1% in 2008. Finally, with inflationary concerns now much-reduced, the weakening growth outlook is likely to push the Czech National Bank towards a further 75bps of cuts in its two-week repo rate, bringing the rate to 1.00% by end-2009, in a bid to stimulate the economy via cheaper lending.

The economic contraction expected in 2009 will severely impact the fortunes of businesses operating in the Czech Republic. In particular, we caution that the ease of accessing credit is likely to remain restricted through the medium term, elevating difficulties in meeting operating costs and weighing on investment. That said, many fundamentals of the Czech business environment will remain favourable compared to most emerging European peers. In particular, the combination of a relatively high skills base coupled to rising unemployment will ensure an abundant pool of affordable labour.

Content

Executive Summary
- 2009 Brings Sharp Recession
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Governing Coalition To Retain Power Into 2010
- The Czech government will remain weak in 2009, as it holds a wafer-thin working parliamentary majority only
- through the support of independents, and suffers from low public approval.
- Foreign Policy
- Elevated Risks To Missile Deal And Lisbon Treaty
- Our core Czech foreign policy scenario remains for both the US missile defence radar deal to move forward and
- the EU's Lisbon Treaty to be ratified in 2009.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Recession In 2009
- We expect Czech GDP to contract by 2.1% in 2009, as external demand, domestic consumption and capital
- investment all shrink.
- Exchange Rate Policy
- Koruna Depreciation To Continue
- The Czech koruna is set to depreciate further in 2009, as falling exports and foreign capital inflows reduce
- demand for the unit.
- Monetary Policy
- Further Monetary Easing Ahead
- We forecast a further 75bps of monetary easing by the Czech National Bank by end-2009, bringing the key
- two-week repo rate down to 1.00%, as the economy sinks into recession and inflationary concerns remain muted.
- Balance Of Payments
- Falling Imports To Improve C/A Position
- The Czech current account deficit is set to narrow rapidly in 2009, as falling domestic consumption, capital
- goods inflows and profit repatriation outstrip the commensurate decline in exports.
- Fiscal Policy
- Stimulus Plan To Push Budget Deficit Higher
- The Czech fiscal deficit is set to widen sharply to 5.2% of GDP in 2009, as rising spending pressures are
- matched by falling revenues caused by the economy sinking into recession.
Chapter 3: 10-Year Forecast
- The Czech Republic Economy To 2018
- Effective Convergence By 2018
- We forecast the Czech Republic to have effectively converged in both economic and political terms with the
- eurozone by the end of our 10-year forecast period in 2018.
Chapter 4: Special Report
- China
- A Seismic Upheaval In 2009?
- One of the biggest - and least discussed - 'wild cards' that could rear its head in 2009 is dramatic political
- upheaval in China.
- United States
- Europe
- Big Trouble For European Banks In 2009
- The deteriorating global macroeconomic outlook, high levels of leverage, and a broken business model will
- combine to spell trouble for the financial services sector in 2009.
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Infrastructure
Chapter 6: Key Sectors
- Market Overview
- Food & Drink
Chapter 7: BMI Global Assumptions
- Global
- Economic Activity
- Monetary Policy
- Commodities
List of Tables
- TABLE: POLITICAL OVERVIEW
- TABLE: ECONOMIC ACTIVITY
- TABLE: EXCHANGE RATE POLICY
- TABLE: MONETARY POLICY
- TABLE: BALANCE OF PAYMENTS (EURO)
- TABLE: FISCAL POLICY
- TABLE: LONG -TERM MACROECONOMIC FORECASTS
- TABLE: Banks' Leverage Ratios
- TABLE: Assets As % of Home Country GDP
- TABLE: Assets As % of Home Country GDP When Eurozone Is Considered 'Home Country'
- TABLE: Exposure As % of Total Exposure To Region
- TABLE: Banks' Foreign Exposure (US$ mn)
- TABLE: Exposure As % of National GDP
- TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- TABLE: BMI LEGAL FRAMEWORK RATINGS
- TABLE: BMI TRADE RATINGS
- TABLE: EUROPE, FDI ANNUAL INFLOWS
- TABLE: TOP EXPORT DESTINATIONS
- TABLE: INDUSTRY AND CONSTRUCTION DATA
- TABLE: CZECH REPUBLIC MASS GROCERY RETAIL SALES BY FORMAT (US$BN)
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: GLOBAL AND REGIONAL REAL GDP GROWTH, % CHG Y-O-Y
- TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS
- TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS
- TABLE: DEVELOPED MARKET EXCHANGE RATES
- TABLE: EMERGING MARKET EXCHANGE RATES