Czech Republic

THE Czech Republic, an open economy with a strong industrial base and exports contributing more than 80pc of GDP, was the first former Eastern Bloc state to acquire the status of a developed economy. It is closely integrated with the EU.

The economy has a robust manufacturing and heavy industry sector, generating much of the country’s revenue. The auto industry is the largest single industry, and, together with its upstream suppliers, accounts for nearly 24pc of Czech manufacturing. The republic produced more than a million cars for the first time in 2010.

The country has been a popular destination for high volumes of foreign direct investment since the 1990s. Compared to its regional peers, it is doing fairly well in per-capita GDP and in terms of competitiveness.

Currently, the republic has recovered from the financial crisis and is experiencing growth across various sectors of the economy, including mergers and acquisitions activity. Czech financial system has remained relatively healthy.

However, the export-driven economy remains sensitive to changes in the economic performance of its main export markets, especially Germany.

When Western Europe and Germany fell into recession in late 2008, the demand for Czech goods plunged, leading to double-digit drops in industrial production and exports. As a result, real GDP fell sharply in 2009. The economy returned to weak growth in 2014. GDP growth increased strongly in 2015 to 4.2pc, partly due to EU-financed public investment. Financial conditions will continue to support domestic demand in 2016.

Growth will slow down to 2.5pc this year but the situation is not expected to deteriorate dramatically according to the European Commission. According to a BMI survey, the Czech Republic has excelled in attracting foreign direct investment over recent years, thanks to its skilled workforce, stable business environment and sound government incentives.

This has played an important role in improving the capacity and productivity of businesses, which has fed through to booming exports. The Czech National Bank expects the economy to expand 2.3pc in 2016 and 3.4pc in 2017.

The largest contributor to GDP growth will continue be private consumption. Strong wage growth will continue to underpin private consumption’s share of the economy. The budget deficit will stay under 2pc of GDP in 2016 and 2017 and overall government debt will fall below 45pc of GDP in the coming years.

According to the IMF, Czech economic performance has been impressive, with output growing strongly and unemployment declining steadily.Supportive macroeconomic policies, along with a favorable external environment and high EU fund utilisation, contributed to a 4.2pc expansion last year.

Solid employment growth helped reduce the unemployment rate to below pre-crisis levels and contributed to a welcome pick up in real wage growth. An increase in interest rates is not expected before 2017 as the exchange-rate obligation to keep the Czech crown exchange rate at the level of at least 27 crowns per euro announced in November 2013 will remain effective in 2016.

The Fund has emphasised on additional ambitious structural reforms which are essential for increasing potential growth. Consideration should be given for measuring enhanced investment in physical and human capital, and for promoting innovation.

Macedonia

MACEDONIA has made significant progress in liberalising its economy and improving its business environment. Its economy is closely linked to Europe as a customer for exports and source of investment. The country has maintained its macroeconomic stability through the global financial crisis by pursuing prudent monetary policy.

Real GDP growth accelerated to 3.8pc in 2014, from 2.7pc in 2013. The strong growth was attributed to a surge in investment driven activities in the Technological Industrial Development Zones and public infrastructure, as well as strong private consumption supported by robust credit growth.

Facing the global financial crisis with one of the lowest public debt-to-GDP ratios in emerging Europe served the country well, but the public sector debt since then has nearly doubled reaching 43.3pc of GDP in 2014.

The under-performance of VAT and non-tax revenues and additional capital expenditures entailed by the worsened security situation resulted in an estimated deficit of above 4pc of GDP in 2015.

The economy continued to grow at a robust rate of 4.2pc in 2015. The IMF has revised up its 2016 economic growth forecast to 3.6pc in its latest World Economic Outlook report from 3.2pc projected earlier. The main driving force behind the growth remains domestic demand. Household consumption will be boosted by increased retirement pensions, social transfers and public sector wages. However, private investments, will remain weak because of the disturbed internal political situation.

According to the central bank governor, downside risks have increased as a result of a political crisis. If the political crisis gripping the country is not resolved by end-year, growth in the economy could be slashed by more than half to 1.6pc in 2016.

Exports of car components (cables, electronic circuits), chemical products, plastics, textiles and clothing, construction materials, food grade glass, will benefit from whatever growth there is in Europe. As imports will rise at the same time because of stronger domestic demand, the contribution from trade to growth should remain slightly negative.

Published in Dawn, Business & Finance weekly, June 20th, 2016