The Czech economy enjoyed a splendid year during 2017. The economy was dynamically growing with both strong exports and households’ demand. It reached the highest growth rate since 2015 (4.4%) but unlike that year in a natural way, without the factor of accelerated spending of EU funds that was then dominant. The exports of goods and services grew on the y-o-y basis by 5.8%. Positive economic indicators were accompanied with significantly low registered unemployment that reached a 3.8% ratio at the end of 2017, and by renewed inflation in consumer prices of 2.5 per cent driven by tense labour market and strong pressure for wage growth. Beside the constantly growing automotive industry certain marks of improvement could be seen also in the so far problematic construction sector.
The economy will continue in a positive development also in 2018 but it is very probable that the brilliant growth rate 2017 will not come again. Recent estimates of GDP growth for the Czech Republic hover around 3.5% not only due to external markets where demand gets near to its peak (especially the demand for cars that form a significant part of Czech exports) and problems of protectionism arise in the global trade scene, but also due to internal limits of the Czech economy where low unemployment blocks investment and, inter alia, signalizes a lack of system space for investment in 4.0 technologies.
The koruna (CZK) will continue its appreciation, potentially under 25 CZK/EUR and 20 CZK/USD which will prompt the inflation to slightly decelerate to a rate around or moderately under 2%, the central bank’s long-term target. This will manifest itself in spite of growing wages and salaries due to the missing workforce in the market (the Ministry of Finance estimates the growth about 8 per cent in 2018). It also signifies that the hitherto prevailing growth model by cheap labour comes definitely to the end. The basic interest rate will be probably raised again and continue to get near to a “normal” level, and also will be pursued by the Czech National Bank with the aim to prevent the economy from overheating.
The planned deficit of the state budget of 50 billion CZK (i.e. about 1.97 billion EUR) is not too extensive but, nevertheless, was subject to criticism by the parliamentary opposition to be too high for the period of extensive economic growth while it was necessary to provide for funds for harder times that are inevitably to return one day. Even if the expected development of tax revenue may act for keeping, or even reduction of the planned deficit, it will still remain in some tension as to the final result due to the need to make preliminary investment into some delayed projects that can only subsequently be co-financed by EU funds.
Once again it is to be accented that the former government did not progress in necessary economic reforms, such as in the social security, health service or education system, and made only simple and partial compensations to some groups of socially exposed persons and to the extending state administration instead. Simultaneously, no trend is available to prove that richer and more numerous state officials will be more efficient in their service to the public. On the opposite, the system of university education, crucial for the accomplishment of necessary structural changes in the sphere of industry decisive for the future of the Czech economy, has remained underfinanced. All in all, the burden of necessary reforms is thus transferred to the difficult new government to be established.
The non-systemic expense steps of the former government have amplified the problem of mandatory expense, originating from legislation or contractual obligations of the state, such as the salaries in the public sector or pensions. Only the newly extended items in the state budget of 2018 are to increase the extent of mandatory expense by more than 35 billion CZK, not speaking of recent decisions like the approved subsidized reduction of public transport fares for pensioners and students from June 2018. Such items of expense may look easy to be introduced in the times of general bonanza but will deepen the deficit in the time of crisis, and may also significantly restrict necessary space for public investment in the long run.
Emanuel Šíp
Partner
Allied Progress Consultants Association