Czech Republic Business Forecast Report Q1
2012
Market Research Report

Czech Republic Business Forecast Report Q1 2012 Market Research Report

Core Views

The Czech economy is highly exposed to the ongoing eurozone sovereign debt crisis via investment, banking and trade links. As such, we expect the ongoing slowdown in eurozone demand to translate to weaker exports out of the Czech Republic. Given that domestic demand remains firmly in the doldrums, the country's export-led recovery is likely to experience a sharp slowdown in 2012.

While we remain broadly positive towards the Czech Republic's fiscal position given the ongoing commitment of the centre-right coalition government to fiscal austerity and the long-term sustainability of fiscal accounts despite ongoing intra-coalition ructions, we caution that the slowdown in economic activity in the country will make it increasingly difficult for the government to rein in the fiscal deficit. As such, we believe the coalition government will likely ease the pace of its austerity drive. That said, given that the lion's share of fiscal consolidation was front-loaded, we do not expect this to substantially affect the country's finances.

The centre-right coalition government still has a highly fractious nature. Our view that re-shuffles in the composition of the coalition would likely occur in 2011 played out, with a number of resignations and new appointments to the cabinet. We expect the government to maintain cohesion in 2012 in the face of the increasingly inclement situation in the eurozone, which would make a collapse of the coalition government disastrous for the country's creditworthiness. However, with pressure on (and within) the coalition set to remain high, we cannot completely rule out a collapse of the government in 2012.

Major Forecast Changes

We have revised down our real GDP forecast for the Czech Republic to 0.8% in 2012 from 2.3% previously. The ongoing deterioration in the external environment, which has recently seen us forecast the eurozone economy to contract by 0.2% in 2012, will have a heavy impact on the Czech export-led economy. Further compounding a negative outlook is our revised view that consumer spending will remain in the doldrums for some time to come. We also highlight that risks to this outlook remain firmly to the downside. On the back of the worsening macroeconomic backdrop, we no longer believe that the government will be able to rein in the deficit below the 3.0% of GDP level mandated by the EU before 2014. We have revised our forecast for the fiscal deficit to come in at 3.7% of GDP in 2012 from 3.4% previously.

We have revised downwards our forecast for average inflation in the Czech Republic to come in at 2.0% in both 2011 and in 2012, from 2.2% and 2.6% previously. Our expectation for weak domestic demand coupled with moderating commodity prices will work to keep inflationary pressures subdued in 2012. On the back of this revision, we have also revised down our rate expectations for 2012, now expecting the policy rate to remain on hold at 0.75% until 2013.

Key Risks To Outlook

A more pronounced slowdown in eurozone growth than we currently forecast would weigh considerably on Czech growth. The country is heavily reliant on the external market for growth, particularly while government expenditures are dragged down by fiscal austerity and as consumers struggle to bounce back from the global recession. Similarly, while we expect that a deepening of the eurozone crisis is a pre-requisite in order to catalyse a policy response, a failure of policymakers to address the issue would likely severely impact on investor sentiment towards the region, and by proxy, the Czech Republic. In this eventuality, we would likely revisit several of our forecasts.

• Executive Summary
• Core Views
• Major Forecast Changes
• Key Risks To Outlook
• Chapter 1: Political Outlook
• SWOT Analysis
• BMI Political Risk Ratings
• Domestic Politics
• Fiscal Tightening Likely To Slow On Dimming Economic Outlook
• We believe the centre-right coalition government will remain committed to fiscal austerity measures in 2012. However, in the face of
• slowing growth and rising public dissatisfaction, we see scope for the pace of implementation to slow somewhat going forward
  • Table: Political Overview
• Regional Politics
• CE To Face Constraints On Regional Assertion
• In light of the ongoing eurozone debt crisis throwing the 'European project' into question and the increase in regional cooperation in
• Central Europe across several fronts, we examine the actual potential for the region to assert itself militarily, economically, and in the
• energy sector. While we expect the region to come up against multiple constraints on its power, we see opportunities in the energy
• sector
• Chapter 2: Economic Outlook
• SWOT Analysis
• BMI Economic Risk Ratings
• Economic Activity
• Slashing Growth Outlook On Eurozone Exposure
• We have revised down our real GDP forecast for the Czech Republic to 0.8% in 2012 from 2.3% previously. The ongoing deterioration
• in the external environment which has recently seen us forecast the eurozone economy to contract by 0.2% in 2012, will have a heavy
• impact on the Czech export-led economy
  • Table: Economic Activity
• Fiscal Policy
• Fiscal Outlook Still Positive Despite Upwards Forecast Revision
• Our positive view towards the Czech Republic's fiscal position remains in play despite our revised budgetary shortfall forecasts. On the
• back of the worsening macroeconomic backdrop, we no longer believe that the government will be able to rein in the deficit below the
• 3.0% of GDP level mandated by the EU before 2014
  • Table: FISCAL PO LICY
• Monetary Policy
• Weak Demand Outlook Prompt Inflation Revision
• We have revised downwards our forecast for average inflation in the Czech Republic to come in at 2.0% in both 2011 and in 2012, from
• 2.2% and 2.6% previously.
  • Table: INFLATION
• Balance Of Payments
• C/A Shortfall To Widen On EZ Crisis Spill Over
• We have revised out current account deficit forecast to 4.8% of GDP in 2012 from 4.3% previously. This marks a widening over our
• estimate for the 2011 shortfall of 4.0% of GDP
  • Table: CURRENT ACCOUNT
• Regional Economic Activity
• Q3 Flash GDP Estimates Largely Confirm Economic Slowdown
• We hold to our view that Central and Eastern European economies are set to experience a marked slowdown going into 2012 as
• external demand languishes and the investment outlook weakens
• Regional Banking Sector
• CEE Risks Rising
• Higher capital adequacy ratio requirements and sovereign mandates for banks to retrench in Western Europe are likely to feed through
• to weaker funding to the Central and Eastern Europe (CEE ) region. We caution that there is a high risk of a credit crunch in CEE
• Chapter 3: 10-Year Forecast
• The Czech Economy to 2021
• Effective Convergence
• The Czech Republic is forecast to remain a positive convergence story through the coming 10 years, despite the severe adverse
• impact of the 2008-2009 global recession, with the eurozone accession policy anchor contributing to steady progress in a long-term
• government reform agenda
  • Table: LONG-TERM MACROECONOMIC FORECASTS
• Chapter 4: Business Environment
• SWOT Analysis
• BMI Business Environment Risk Ratings
• Business Environment Outlook
• Institutions
  • Table: BMI BUSINESS AND OPERATION RISK RATINGS
  • Table: BMI LEGAL FRAMEWORK RATING
• Infrastructure
  • Table: LABOUR FORCE QUA LITY
• Market Orientation
  • Table: EMERGING EUROPE - ANNUA L FDI INFLOWS
  • Table: TRADE AND INVESTMENT RATINGS
  • Table: TOP EXPORT DESTINATIONS
• Operational Risk
• Chapter 5: Key Sectors
• Infrastructure
• Executive Summary
• The Czech Republic has fared far better than much of the region and the power sector has provided a huge boost to the infrastructure
• sector, thought the future is slightly less certain in a global economic environment that is struggling
• Market Overview
• Industry Forecast
  • Table: Czech Republic Residential and Non-residential Build ing Industry Data
• Oil & Gas
• Executive Summary
• Market Overview
  • Table: Czech Republic Oil And Gas - Historical Data And Forecasts, 2008-2015
• Other Key Sectors
  • Table: Autos Sector Key Indicators
  • Table: Food and Drink Sector Key Indicators
  • Table: Pharma Sector Key Indicators
  • Table: Telecoms Sector Key Indicators
  • Table: Defence and Security Sector Key Indicators
  • Table: Freight Key Indicators
• Chapter 6: BMI Global Assumptions
• Global Assumptions
• Eurozone Break-Up Risks Rising
  • Table: GLOBAL ASSUMPTIONS
  • Table: EMERGING MARKETS AGGRE GATE GRO WTH
  • Table: DEVELOPE D STATES REAL GDP GROWTH FORECAST
  • Table: REAL GDP GROWTH CONSENSUS FORECASTS
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