Country Report Czech Republic June 2009

Outlook for 2009-10

• A non-partisan government has been formed to complete the country's EU presidency and prepare the 2010 budget, ahead of the parliamentary election that will be brought forward to October 2009.
• As the Civic Democratic Party (ODS) and the opposition Czech Social Democratic Party (CSSD) are running almost level in opinion polls, it is difficult to say at this point who will win the next election.
• The CSSD may be able to form a parliamentary majority with informal support from the far-left Communist Party of Bohemia and Moravia (KSCM).
• Our outlook for the euro zone in 2009-10 is pessimistic. Based on this, as well as falling consumer and business confidence, we expect the Czech economy to contract by 3% in 2009. A modest recovery is expected in 2010.
• The Czech National Bank (CNB, the central bank) started to loosen monetary policy in August 2008. However, the CNB is likely to take a cautious approach to further rate cuts, owing to concerns about the currency.
• Inflation in 2008 was driven by increases in regulated prices and indirect taxes, but it is expected to fall sharply in 2009, as a result of lower import prices and weak domestic demand.
• We forecast that the current-account deficit will average 2.2% of GDP during the forecast period.

Monthly review

• On May 8th the president, Vaclav Klaus, officially swore into office an interim government led by Jan Fischer, a former head of the Czech Statistical Office.
• Two days before the new government was appointed, the Senate (the upper house of parliament) approved the EU's Lisbon treaty, with the required three-fifths majority.
• The April macroeconomic forecast of the Ministry of Finance sees the public finance deficit swelling to 4.5% of GDP in 2009, or Kc167bn (US$8.4bn).
• The CNB cut its benchmark interest rate by 25 basis points in April, to 1.5%. This is the fifth rate cut since the CNB started to loosen monetary policy in August 2008.
• The government issued a 1.5bn (US$2bn) Eurobond in April, which has a maturity of five and a half years, bears a 4.5% coupon and was priced 190 basis points over mid-swaps.
• According to flash estimates, the economy contracted by 3.2% year on year in the first quarter, owing to weak export performance, which has had a knock-on effect on industrial output and investment.

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