Country Report Czech Republic December 2008

Outlook for 2009-10

• Proposals for radical reform will be met with strengthening opposition from within the ruling coalition. The prime minister, Mirek Topolanek, will therefore have to make concessions to his coalition partners on crucial legislation.
• There is a threat to the government's stability, owing to a possible internal rebellion within the main ruling party, the Civic Democratic Party (ODS).
• Domestic demand will drive economic expansion in 2009-10, as the contribution of net trade to GDP growth will fall. Real GDP is forecast to grow by 3% in 2009, rising to 3.4% in 2010.
• Inflation in 2008 was driven by increases in regulated prices and indirect taxes, but it will fall from 2009 as these effects work their way through theeconomy.
• The Economist Intelligence Unit forecasts that the current-account deficit will average around 3% of GDP during the forecast period.

Monthly review

• The Czech Republic appears set for a period of political instability following a serious defeat in regional and Senate elections for the ODS.
• The election results represent a victory not only for the Czech Social Democratic Party (CSSD), but also for the ODS faction opposed to MrTopolanek.
• The 2009 budget gained parliamentary approval in its first reading in October. The central state budget, the main component of the public finance balance, targets a deficit of Kc38.1bn (US$2.2bn), the lowest in the past decade.
• Despite having stronger fundamentals than some other countries in the region, the Czech Republic is facing difficulties in raising debt financing, indicative of the fact that the global credit crunch is affecting all markets.
• Following a rate cut of 25 basis points in August, the Czech National Bank (CNB, the central bank) slashed interest rates by 75 basis points in early October, to 2.75%.
• The central bank introduced a new facility in October aimed at providing more liquidity by extending two-week loans in exchange for state bonds ascollateral.
• According to flash estimates, real GDP growth was a surprising 4.7% year on year in the third quarter of 2008, compared with 4.3% in the second quarter.
• Skoda Auto, a unit of Volkswagen (Germany), has cut its production targets and will halt production at various points at its Czech plants. By contrast, Hyundai (South Korea) has just opened a factory in the Czech Republic.

Source: Country Report

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52