Czech Republic

Rebalancing required as GDP decline continues

GDP fell 1.7% year-on-year in Q4 2012. This corresponds to a 1.2% decline for the full year and is in line with our expectations. Domestic demand will remain weak in 2013 due to ongoing government austerity and weak household spending. On a more positive note, we think that recovering demand from emerging markets and Eurozone countries will boost Czech exports later this year, partly offsetting the continued weakness in domestic demand. As a result, we think that GDP will fall by just 0.5% in 2013. However, the impact of government austerity could be more severe than anticipated. The Czech National Bank (CNB) has very limited scope to offset the negative impact of austerity measures because its key interest rate is zero.

By 2015-16, we expect GDP growth to be about 3% – below the IMF projection of 3.4% growth – with this pace likely to be broadly maintained through the rest of the decade. The main constraint on expansion is the ageing population, which will cause the labor supply to decline and slow productivity growth. In addition, we believe that the current growth model of the Czech economy is very dependent on the external sector – exports, export-related investment and external financing – and the Czech economy needs to rebalance in the medium term. However, given the weak growth in the Eurozone, neither exports nor foreign direct investment are expected to return to pre-crisis growth rates in the medium term.

Consumption and investment