World economies

Published November 6, 2017

Czechia, also known as the Czech Republic, is one of the most stable and prosperous markets in Central Europe.

It has a highly diverse economy based on services, manufacturing and innovation that maintains a high-income welfare state. The services sectors contribute 60 per cent to the GDP while industry accounts for 38pc.

Its economy boasts one of the highest GDP growth rates and lowest unemployment levels in the EU, but its dependence on exports makes economic growth vulnerable to contractions in external demand.

It has one of the best infrastructure networks in the region, and is fast catching up with Western European levels.

The economy is supported by robust exports, chiefly in the automotive and technology sectors, with close economic ties to Germany and Slovakia. Automobile is the single largest industry. Exports comprise some 80pc of GDP. Export-to-GDP ratio is one of the highest in the EU, and due to foreign investment, the Czechia economy is highly integrated into international value chains.

In 2014, the government undertook some reforms to reduce corruption, attract investment, and improve social welfare programs, as an attempt to increase the government’s revenues and improve Czechs’ living conditions. GDP per capita at $33,232 is one of the highest in Central and Eastern Europe.

Economic growth is projected to pick up in 2017 as strong labour demand and limited labour supply will push the unemployment rate to new lows, boosting wages. Private and public investment is recovering.

Since early 2017, labour demand has remained high and is fuelling wage growth and consumer confidence. Recent data released by the National Statistics Office suggests the economy has shifted into a higher gear and growth is expected to accelerate in 2017 as the economic activity continues to grow robustly in the third-quarter after strengthening in the second-quarter on the back of a broad-based expansion.

In the second-quarter, the economy jumped on stronger fixed investment and private consumption, growing 4.5pc in annual terms which represented a significant acceleration compared to the 3pc rise in first-quarter. This is expected to translate into acceleration in 2017 growth.

The Czech National Bank expects the economy to expand 2.9pc in 2017 and 2.8pc in 2018. According to the IMF, growth this year could be close to, or even over 3pc, but also warned that labor shortages are expected to constrain growth to about 2.5pc.

EU expects the economy to grow by 2.6pc in 2017, slightly above the 2.4pc in 2016. The main contribution to GDP growth is expected to come from domestic demand.

The Commission is of the view that the economy should benefit from the ongoing recovery of global trade. Exports are expected to increase by 4.2pc in 2017, sufficient to provide a positive contribution to GDP growth. Euler Hermes Research Group (EH) and Moody’s forecast real GDP growth of 3pc in 2017.

Many economists are of the view that a risk on the horizon, however, stems from the car market in Europe, which is probably approaching the point of saturation after three years of expansion. A slowdown in demand for cars could hit the most important sector of Czech industry.

In 2018, EU projects the growth to remain almost unchanged, with domestic demand remaining buoyant and the contribution from net exports narrowing towards zero, while the EH forecasts GDP growth to ease slightly to 2.8pc. The IMF also projects a slower growth at around 2pc next year.

Fiscal policy is projected to be slightly expansionary in 2017, reflecting public sector wage increases, and national and EU funded projects ramping up again, and neutral in 2018.

Slovakia

The republic has undergone a transition from a centrally planned economy to a free market economy and became one of the most attractive investment locations in Central Europe.

With its business- and investment-oriented economic environment, Slovakia became an important member of European Union (EU) in 2004 and now is a part of the world’s largest common market comprised of more than 450 million consumers. The country’s banking sector is sound and predominantly foreign owned.

The main sources of Slovak growth are its skilled and educated labor force, low taxation and progressive entrepreneurial and investment legislation. The Slovak economy has improved somewhat in recent years. Foreign trade is important to Slovakia’s economy.

Exports include machinery, chemicals, fuels, steel, and weapons. The Czech Republic, Slovakia’s main trading partner, supplies about 30pc of Slovakia’s imports and purchases approximately 40pc of its exports. Austria, Germany, and Russia are Slovakia’s other leading trade partners.

Exports, mainly driven by automobile and electronics, are the main contributor to GDP growth, accounting for about 93pc. It is the fastest growing economy in Central Europe

From 2017 onwards, the Slovak economy stands to benefit from the expected recovery in global trade. The economy is set to remain on a solid growth path, with household consumption becoming the main driver of growth. A gradual recovery is also expected in investment in 2017 which will accelerate thereafter, driven by private investment in the automotive industry and large infrastructure projects.

The National Bank of Slovakia projects GDP to grow 3.2pc in 2017 and 4.2pc in 2018. FocusEconomics Consensus Forecast panelists expect GDP growth to reach 3.5pc in 2018. OECD projects 4.1pc growth in 2018, led by persistently strong domestic demand.

The strengthening labour market and rising incomes will further raise household consumption.

The expansion of production plants in the automotive industry, with the new Jaguar car plant planned to be operational from 2018, is expected to positively affect exports, including outside the EU.

Public finances have continued to improve. Fiscal policy is likely to be tightened, with the budget deficit declining to a new historical low of -1.3pc of GDP in 2017.

Published in Dawn, The Business and Finance Weekly, November 6th, 2017

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