Country Report Czech Republic

Outlook for 2008-09

• The government's effectiveness depends on the ability of the prime minister, Mirek Topolanek, to balance the demands of his diverse governing coalition, as well as on the continued support of renegade opposition deputies.
• There is a threat to the government's stability in the longer term, owing to the possibility of an internal rebellion within the main ruling party, the Civic Democratic Party (ODS).
• Interest rates could be kept on hold over the next few months, before declining towards the end of 2008, unless high inflation raises expectations.
• Domestic demand will drive economic expansion in 2008, but net trade will provide the main boost to growth from 2009. Real GDP growth is forecast at 4.7% in 2008 and is expected to accelerate to 5.4% in 2009.
• Inflation will rise in 2008, owing to increases in regulated prices and indirect taxes, but will begin to decline in 2009 as these effects work their way through the economy.
• The Economist Intelligence Unit projects that the current-account deficit will average around 2.7% of GDP during the forecast period.

Monthly review

• The government has survived a vote of confidence, which was initiated by the main opposition Czech Social Democratic Party (CSSD) in April.
• Disputes within the governing coalition over flagship health reforms, church restitution and the planned US radar base are being exacerbated by the opposition's sustained lead in the opinion polls
• The central state budget deficit—the main component of the public finance balance, which also includes off-budget funds—was Kc28bn (US$1.5bn) in January-April 2008, compared with a deficit of Kc17bn a year earlier.
• The Czech National Bank (CNB, the central bank) kept interest rates unchanged at its April meeting.
• The Ministry of Finance has announced that it intends to issue a €1bn (US$1.55bn) Eurobond with a maturity of between ten and 20 years, possibly at the end of June.
• According to flash estimates, real GDP growth decelerated to 5.4% in the first quarter of 2008, the slowest pace of growth in more than three years.
• Consumer price inflation reached 6.8% in April, down from 7.1% in March, but still higher than market expectations.