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The Czech Economy should Keep Growing in Upcoming Years

Prague, 13 January 2015 – In the upcoming five-year period (2016 - 2020), the Czech economy is expected to continue its positive trend of GDP growth: the average growth rate is estimated at 1.7 per cent. This will lead to a gradual convergence with the EU-28 average of GDP per capita, recalculated according to purchasing power parity. In 2020, the Czech Republic could reach the level of 85-86% of the EU average. This could mean that the Czech Republic would overtake Slovenia in the CE top rankings. On the other hand, Slovakia will also keep growing and by the end of the decade it might rank higher than the Czech Republic among CE countries, with the possibility of reaching 90% of the EU average by 2020. This is according to the economic analysis prepared by Deloitte.

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“Although optimism regarding the further developments in the eurozone has subsided somewhat, moderate GDP growth is still expected to continue this year. Countries that are important in terms of the Czech Republic’s foreign trade should maintain their faster growth rates. The average estimate of Germany’s GDP increase is 1.5 percent, and 2.8 percent for Slovakia,” said Josef Kotrba, Deloitte Czech Republic’s Office Managing Partner.

“In light of the Czech economy’s past performance, the GDP growth estimate for the upcoming five years may seem low; however, we must also take into account the anticipated external developments. If the German economy’s average growth rate is only 1.4 percent, the possibilities of the Czech economy’s growth are also limited to a significant extent,” said David Marek, Deloitte’s chief economist, adding: “From the Czech economy’s point of view, the developments in the eurozone are the key risk, as the growth rate in some of these countries has seen a substantial decrease and may continue dropping unless structural reforms are implemented. Another risk regarding the eurozone is deflation and its negative impacts.”

Medium-Term Outlook for the Eurozone in 2016 - 2020

In the situation which is referred to as the “new normal”, it may be anticipated that in 2016-2020, the global economy’s growth rate will be between 3.6 and 3.7 percent per year. To provide data for comparison, the average growth rate between 2010 and 2014 was 3.9 percent per year, and 4.0 percent in the first decade of this century.

The eurozone should be the slowest-growing advanced economic area with an average growth rate of one percent, while Germany’s average growth rate should be at 1.4 percent, France’s at 1.1 percent, and the average growth rate of the third largest economy of the Eurozone – Italy – should only be at 0.6 percent. Among CE countries, Poland and Slovakia should remain the most dynamic with a GDP growth rate of approximately 3 percent per year.

Medium-Term Outlook for the Czech Republic in 2016 - 2020

  • GDP growth The average growth rate of the Czech economy should reach 1.7 percent in the second half of this decade. This tempo will lead to a gradual convergence with the EU-28 average in terms of GDP per capita recalculated according to purchasing power parity.

“In 2013, the Czech Republic was at 81 percent of the average EU level. In 2020, it could reach 85-86 percent of the EU average – the convergence will remain relatively slow. In the past 15 years, the Czech Republic has been approaching the EU average at a rate of 0.3 percentage points per year, which is significantly slower than the other Central European economies,” added David Marek.

  • Unemployment rate – According to the methodology of the Czech Statistical Office, the Czech average unemployment rate should be at 5.8 percent. The total average employed should be in the amount of 4.97 million people, assuming a gradually decreasing share of the working-age population. The average salary will increase at a nominal rate of 4.0 percent, which corresponds with a real rate of 2.0 percent.
  • Import and Export – Both import and export should grow at an average rate of 8 percent. The surplus of foreign trade will remain high and will reach average values of between CZK 240 and 270 billion per year. The current account of the balance of payments will be positive in the second half of the decade in particular due to the high surplus of foreign trade. On average, its value should be at 1.4 percent of GDP.
  • Inflation – Inflation in consumer prices should oscillate around the inflation target of the central bank between 2016 and 2020 and should display an average rate of 2.0 percent. The same should apply for the index of industrial producer prices.  
  • The CZK/EUR rate – The exchange rate of the Czech crown will return to a gradual real appreciation after the Czech National Bank’s exchange rate commitment expires. However, the real appreciation rate (the exchange rate’s appreciation as compared to foreign currencies) will be a very moderate one: on average, it should only reach 0.6 percent between 2016 and 2020.

“Keeping in mind the low inflation in the eurozone, the difference in the development of prices should be the most important factor in accounting for the strengthening of the currency. The nominal rate’s appreciation will be very moderate. In 2020, the CZK exchange rate should be at 26-28 crowns per euro,” added Josef Kotrba.

  • Fiscal policy – Presuming that neither tax rates nor the development of key budget expenditures change significantly, and presuming that the government adjusts for an additional impulse in 2016 in line with its present intentions, the public sector deficit should have an average value of 0.8-2.2 percent of GDP depending on the economic cycle. Given this trend in fiscal policy, the debt of the public sector should be at 42 percent of GDP in 2020.

“However, it should be pointed out that it is rather difficult to make estimates regarding the development of fiscal policy, as the government’s budget decisions will primarily be based on the results of the parliamentary elections,” added David Marek.

You can download the whole study named The Outlook of the Czech Economy for 2015 at: edu.deloitte.cz.

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