Country Report Czech Republic November 2009

Outlook for 2010-11

• The non-partisan interim government—which has been in charge since May 2009, after the previous, centre-right government lost a confidence vote—is likely to remain in power until the next general election, in mid-2010.
• The Czech Social Democratic Party (CSSD) is ahead of the Civic Democratic Party (ODS) in opinion polls, but the composition of the government following the election depends on which smaller parties gain representation.
• Our baseline forecast is that the CSSD will form a government with informal support from the far-left Communist Party of Bohemia and Moravia (KSCM), but there is still a chance of a grand CSSD-ODS coalition.
• Both scenarios imply a continuation of earlier patterns of patchy and incremental reforms.
• The heavily export-oriented economy will benefit from an economic recovery in the euro zone in 2010, enabling the economy to grow by 0.9%. Growth is expected to strengthen in 2011 as domestic and external demand rebound.
• Inflation will rise in 2010-11—owing to a recovery in domestic demand (which will restore pricing power to producers) and stronger nominal wage growth—but will remain below the central bank's target rate of 2%.
• We expect the current-account deficit to widen as a share of GDP over the forecast period as domestic demand strengthens.

Monthly review

• Following an agreement by the main political parties, the non-partisan interim government is set to remain in power until the next scheduled election, in June 2010.
• The European Commission is considering launching an excessive deficit procedure against the Czech Republic (and eight other countries, including Germany), for violating EU fiscal rules.
• In October the lower house of parliament approved the 2010 state budget draft in the first of three readings. Approval on first reading means that revenue and expenditure targets are now fixed and unchangeable.
• Central state budget expenditure is set at Kc1.2trn (US$65.8bn) and revenue is set at Kc1trn, resulting in a deficit of Kc162.7bn (US$8.7bn; 5.3% of GDP).
• The government has abandoned plans to privatise Czech Airlines, as needed investment in the company ahead of a sale would have resulted in a net loss to the state.
• The current account recorded a deficit of US$1.5bn in the second quarter of 2009, less than one-half of the deficit recorded a year earlier.

This report covers the following industry codes:
SIC Code: 60;89;49
NAICS Code: 52;81;22