Country Forecast Czech Republic September 2017 Updater

Country Forecast Czech Republic September 2017 Updater

  • September 2017 •
  • Report ID: 1698480 •
  • Format: PDF


  • The Economist Intelligence Unit expects the broadly centrist three-party coalition government to serve its full term to October 2017, despite a sharp rise in hostilities between the coalition partners in May 2017. The coalition is led by the centre-left Czech Social Democratic Party (CSSD) and includes the Christian Democrats (KDU-CSL) and the centrist ANO, led by Andrej Babis, a billionaire businessman and until recently the finance minister.
  • We forecast that Mr Babis's ANO movement will win the largest share of the vote in the general election and become the senior partner in the next coalition. ANO will continue to focus on running the country efficiently and cracking down on corruption (albeit only in selective areas), and we expect the continuation of a pro-business and fiscally responsible policy agenda.
  • After recording a 0.6% of GDP surplus in 2016 as tax revenue rose strongly, EU fund inflows remained robust and some capital investment projects were delayed, we expect the budget to return to a small deficit in 2017, reflecting pre-election spending, and in particular public-sector wage rises. We forecast that the budget deficit will remain smaller than 1% of GDP throughout 2017-21.
  • Real GDP growth slowed to 2.5% in 2016 as investment contracted, after a surge in EU fund inflows in 2015 resulted in unusually strong GDP growth of 5.4%. We forecast a pick-up to 4.5% growth in 2017, and annual average growth of 2.5% in 2018-21, driven by strong private consumption growth and investment spending. The dominant automotive sector will drive export volumes.
  • In the longer term income convergence will further reduce the unit labour cost differential with western Europe, eroding cost advantages for exporters and prompting greater policy-led efforts to attract investment into high value added industrial sectors. EU funds are likely to be significantly reduced after 2020, owing to the exit from the bloc of the UK, a major contributor to the budget.
  • Inflation averaged 2.4% in January-July, and we forecast an average rate this year of 2.4%. The Czech National Bank (CNB, the central bank) started to tighten monetary policy in August 2017, and we expect further gradual rate rises, particularly once the European Central Bank (ECB) begins tapering in 2018.
  • The Kc27:EUR1 ceiling on the value of the koruna was lifted on April 6th. This resulted in mild currency volatility as extensive speculative positions were unwound, followed by a gradual appreciation, which we expect to continue over the medium term. We forecast a year-end rate of Kc25.7:EUR1, and a further strengthening to Kc25.5:EUR1 by 2021.


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