Abstract
Growth in the Czech Republic is projected to slow sharply in 2009 amid a gathering recession abroad and tightening credit at home. This 2008 Article IV Consultation highlights that the shrinking demand from the euro area, especially Germany, will curtail exports and direct investment inflows. Executive Directors have praised the generally strong fundamentals that have helped the Czech economy weather the initial spillover effects of the global financial crisis relatively well. Directors have supported the Czech National Bank’s recent decisions to cut the policy interest rate.
This statement provides information on economic developments since the staff report was issued. The new information does not alter the thrust of the staff appraisal.
1. The downturn in demand and activity accelerated sharply and inflation slowed further. Industrial production fell by 17 percent in the year to November 2008, led by a sharp decline in the automobile sector, and retail sales dropped by over 6 percent over the same period. Exports fell by almost 18 percent, led by vehicles and machinery, while imports declined by 13 percent. Indicators of consumer and business confidence fell further in January 2009. Consumer price inflation declined to 3.6 percent in the year to December 2008, a 15-month low, driven by prices of food and fuel.
2. Staff has lowered its projection for growth in 2009 to -1¼ percent from 1½ percent. The sharp downward revision reflects the deepening recession in the euro area, especially Germany, as well as deteriorating prospects for domestic demand. While investment is set to slow down markedly, especially in the key automobile sector, private consumption is projected to weaken further, reflecting dimmer prospects for employment and lower household confidence.
3. The authorities have lowered their projection for growth as well. The Ministry of Finance now forecasts growth of 1.4 percent in 2009, down from 3.7 percent. The sharp downward revision is driven by exports of goods and services, which are expected to fall by close to 1 percent. The Czech National Bank (CNB) is due to publish its latest assessment of economic prospects on February 5. Based on public statements of CNB officials, market participants expect a sharp downward revision in the forecast for growth and a further cut in the policy interest rate.
4. In light of the worsened outlook for growth, the authorities revised the budget for 2009 in late January. The Ministry of Finance raised its projection for the fiscal deficit to 3 percent of GDP from 1.6 percent of GDP (on ESA-95 basis). The higher deficit reflects primarily lower revenues, and is to be partially financed through a drawdown of reserves. With the deficit outturn for 2008 better than expected at around 1¼ percent of GDP due to lower capital spending, the revised budget implies a slightly expansionary fiscal stance for 2009.
5. The koruna continued to depreciate, in line with the trend in the regional currencies. Against the euro, the koruna fell by 4.1 percent during January, following a decline of 6 percent in December 2008.
Czech Republic: Selected Economic Indicators, 2003-10
In percent of total labor force.
On ESA-95 basis.
For 2008, data refer to November.
Czech Republic: Selected Economic Indicators, 2003-10
| 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||
|---|---|---|---|---|---|---|---|---|---|---|
| Staff Est. | Staff Proj. | |||||||||
| Real economy (change in percent) | ||||||||||
| Real GDP | 3.6 | 4.5 | 6.3 | 6.8 | 6.0 | 4.0 | -1.3 | 1.4 | ||
| Domestic demand | 4.1 | 3.2 | 1.3 | 5.4 | 5.1 | 2.5 | -0.1 | 1.3 | ||
| CPI (year average) | 0.1 | 2.8 | 1.8 | 2.5 | 2.8 | 6.3 | 2.1 | 2.0 | ||
| PPI (year average) | -0.3 | 5.7 | 3.0 | 1.6 | 4.0 | 4.4 | n.a. | n.a. | ||
| Unemployment rate (in percent) | ||||||||||
| Survey-based 1/ | 7.8 | 8.3 | 7.9 | 7.1 | 5.3 | 4.0 | 5.3 | 5.6 | ||
| Registered 1/ | 9.9 | 9.8 | 8.9 | 8.1 | 6.6 | 5.3 | 6.5 | 6.9 | ||
| Gross national savings (percent of GDP) | 21.1 | 22.4 | 24.3 | 23.9 | 24.8 | 22.9 | 22.4 | 22.6 | ||
| Gross domestic investments (percent of GDP) | 27.4 | 27.6 | 25.7 | 25 | 25 | 25.1 | 25.5 | 25.9 | ||
| Public finance (percent of GDP) 2/ | ||||||||||
| General government revenue | 40.7 | 42.2 | 41.3 | 41.1 | 41.6 | 41.2 | 41.1 | 41.1 | ||
| General government expenditure | 47.3 | 45.1 | 44.8 | 43.8 | 42.6 | 42.5 | 44.4 | 44.5 | ||
| Net lending | -6.6 | -2.9 | -3.6 | -2.7 | -1.0 | -1.2 | -3.3 | -3.4 | ||
| General government debt | 30.1 | 30.4 | 29.7 | 29.6 | 28.9 | 29.2 | 31.4 | 33.1 | ||
| Money and credit (end of year, percent change) | ||||||||||
| Broad money 3/ | 6.9 | 4.4 | 8.0 | 9.9 | 13.2 | 7.9 | n.a. | n.a. | ||
| Private sector credit (percent change, eop) 3/ | 11.8 | 15.3 | 20.8 | 21.6 | 27.3 | 19.0 | n.a. | n.a. | ||
| Interest rates (in percent, year average) | ||||||||||
| Three-month interbank rate | 2.1 | 2.6 | 2.2 | 2.6 | 4.1 | 3.6 | n.a. | n.a. | ||
| Ten-year government bond | 4.8 | 4.0 | 3.6 | 3.7 | 4.7 | 4.1 | n.a. | n.a. | ||
| Balance of payments (percent of GDP) | ||||||||||
| Trade balance | -2.7 | -0.5 | 2.0 | 2.0 | 3.4 | 2.6 | 1.0 | 0.5 | ||
| Current account | -6.2 | -5.2 | -1.3 | -2.6 | -1.8 | -2.2 | -3.1 | -3.3 | ||
| Gross international reserves (US$ billion) | 27.0 | 28.4 | 29.6 | 31.5 | 34.9 | 38.3 | 44.4 | 47.2 | ||
| Reserve cover (in months of imports of goods and services) | 5.5 | 4.5 | 4.1 | 3.6 | 3.2 | 2.7 | 3.0 | 3.0 | ||
| Exchange rate | ||||||||||
| Nominal effective exchange rate, pa (2000=100) | 116.8 | 118.0 | 125.3 | 131.7 | 135.6 | 140.6 | n.a. | n.a. | ||
| Real effective exchange rate, pa (CPI-based; 2000=100) | 116.8 | 118.3 | 125.3 | 132.3 | 136.8 | 148.5 | n.a. | n.a. | ||
In percent of total labor force.
On ESA-95 basis.
For 2008, data refer to November.
Czech Republic: Selected Economic Indicators, 2003-10
| 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||
|---|---|---|---|---|---|---|---|---|---|---|
| Staff Est. | Staff Proj. | |||||||||
| Real economy (change in percent) | ||||||||||
| Real GDP | 3.6 | 4.5 | 6.3 | 6.8 | 6.0 | 4.0 | -1.3 | 1.4 | ||
| Domestic demand | 4.1 | 3.2 | 1.3 | 5.4 | 5.1 | 2.5 | -0.1 | 1.3 | ||
| CPI (year average) | 0.1 | 2.8 | 1.8 | 2.5 | 2.8 | 6.3 | 2.1 | 2.0 | ||
| PPI (year average) | -0.3 | 5.7 | 3.0 | 1.6 | 4.0 | 4.4 | n.a. | n.a. | ||
| Unemployment rate (in percent) | ||||||||||
| Survey-based 1/ | 7.8 | 8.3 | 7.9 | 7.1 | 5.3 | 4.0 | 5.3 | 5.6 | ||
| Registered 1/ | 9.9 | 9.8 | 8.9 | 8.1 | 6.6 | 5.3 | 6.5 | 6.9 | ||
| Gross national savings (percent of GDP) | 21.1 | 22.4 | 24.3 | 23.9 | 24.8 | 22.9 | 22.4 | 22.6 | ||
| Gross domestic investments (percent of GDP) | 27.4 | 27.6 | 25.7 | 25 | 25 | 25.1 | 25.5 | 25.9 | ||
| Public finance (percent of GDP) 2/ | ||||||||||
| General government revenue | 40.7 | 42.2 | 41.3 | 41.1 | 41.6 | 41.2 | 41.1 | 41.1 | ||
| General government expenditure | 47.3 | 45.1 | 44.8 | 43.8 | 42.6 | 42.5 | 44.4 | 44.5 | ||
| Net lending | -6.6 | -2.9 | -3.6 | -2.7 | -1.0 | -1.2 | -3.3 | -3.4 | ||
| General government debt | 30.1 | 30.4 | 29.7 | 29.6 | 28.9 | 29.2 | 31.4 | 33.1 | ||
| Money and credit (end of year, percent change) | ||||||||||
| Broad money 3/ | 6.9 | 4.4 | 8.0 | 9.9 | 13.2 | 7.9 | n.a. | n.a. | ||
| Private sector credit (percent change, eop) 3/ | 11.8 | 15.3 | 20.8 | 21.6 | 27.3 | 19.0 | n.a. | n.a. | ||
| Interest rates (in percent, year average) | ||||||||||
| Three-month interbank rate | 2.1 | 2.6 | 2.2 | 2.6 | 4.1 | 3.6 | n.a. | n.a. | ||
| Ten-year government bond | 4.8 | 4.0 | 3.6 | 3.7 | 4.7 | 4.1 | n.a. | n.a. | ||
| Balance of payments (percent of GDP) | ||||||||||
| Trade balance | -2.7 | -0.5 | 2.0 | 2.0 | 3.4 | 2.6 | 1.0 | 0.5 | ||
| Current account | -6.2 | -5.2 | -1.3 | -2.6 | -1.8 | -2.2 | -3.1 | -3.3 | ||
| Gross international reserves (US$ billion) | 27.0 | 28.4 | 29.6 | 31.5 | 34.9 | 38.3 | 44.4 | 47.2 | ||
| Reserve cover (in months of imports of goods and services) | 5.5 | 4.5 | 4.1 | 3.6 | 3.2 | 2.7 | 3.0 | 3.0 | ||
| Exchange rate | ||||||||||
| Nominal effective exchange rate, pa (2000=100) | 116.8 | 118.0 | 125.3 | 131.7 | 135.6 | 140.6 | n.a. | n.a. | ||
| Real effective exchange rate, pa (CPI-based; 2000=100) | 116.8 | 118.3 | 125.3 | 132.3 | 136.8 | 148.5 | n.a. | n.a. | ||
In percent of total labor force.
On ESA-95 basis.
For 2008, data refer to November.