World economies
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.
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