Country Forecast Czech Republic February 2013 Updater

Country Forecast Czech Republic February 2013 Updater

Overview

The Czech Republic is governed by a two-party centre-right coalition comprising the Civic Democratic Party (ODS) and TOP 09, with support from a small liberal-democratic party (LIDEM). Tensions persist within the government, particularly now that it no longer commands a decisive parliamentary majority. Public confidence in the government and leading politicians is low. Political and social instability is rising as a result of the ongoing austerity drive, which the government intends to stretch out over 2013-15. Real GDP is estimated to have contracted by 1.2% in 2012, owing to the adverse impact of fiscal consolidation on domestic demand, combined with faltering external demand among trading partners in the euro zone. We forecast stagnation in the domestic economy, with growth 0f just 0.1%, in 2013. Growth is forecast to average 2.3% per year in 2013-17, which is sluggish compared with 2003-07.

Key changes from last month

Political outlook

The opposition Czech Social Democratic Party (CSSD) and the Communist Party of Bohemia and Moravia (KSCM) are expected to join forces in parliament and in the regions in the run-up to the next general election. Pressure on the government remains intense, particularly now that the CSSD has intensified its opposition to government after initiating the latest no-confidence vote in mid-January 2013.

Economic policy outlook

According to the 2013 budget, the government remains committed to narrowing the deficit to less than 3% of GDP in 2013. However, the risk of fiscal slippage persists, particularly as the current crisis in the domestic economy does not appear to have bottomed out as yet.

Economic forecast

Real GDP declined by 1.3% year on year in the third quarter, accelerating from a contraction of 1% in the second quarter and 0.5% in the first quarter. The Economist Intelligence Unit estimates that real GDP contracted by 1.2% in 2012.

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