Weak economic performance at the Czech Republic

Low demand from EU trading partners will continue to hit Czech Republic? exports. After a 1.2% year-on-year contraction in 2012, the Czech economy continued to shrink in 2013.

Madrid - 02-set-2013

Uncertainty continues to characterise the Czech domestic political landscape. On 17 June 2013 the Prime Minister resigned after prosecutors charged his chief of staff with corruption and abuse of power, precipitating the end of the ruling centre-right coalition. The President refused to appoint the coalitions replacement candidate. Instead he nominated a confidant, former finance minister as successor, with the task of forming a caretaker government of technocrats. Any legislative proposals or initiatives made by the government are likely to be opposed. This could also affect budget planning for 2014, limiting non-mandatory spending at 2013 levels.

After a 1.2% year-on-year contraction in 2012, the Czech economy continued to shrink in Q1, with GDP forecast to decrease 0.8% in 2013. The continued weak economic performance is partly the result of austerity measures. Tax increases and public sector cuts have lessened the purchasing power and confidence of both households and businesses, with a consequent impact on domestic demand. Private consumption is expected to increase only slightly by 1.2% - this year after a 2.6% decrease in 2012, while lower government spending will continue to have a negative effect on growth. Industrial production will level off this year after a drop in 2012, investments will continue to decrease.

At the same time, low demand from EU trading partners will continue to hit exports. At more than 75%, the Czech Republic export-to-GDP ratio is one of the highest in the EU, making it especially vulnerable to trade losses. The contribution of net exports to GDP will turn negative in 2013 as Eurozone growth shrinks by 0.7%.

Despite this, economic growth is forecast to rebound significantly next year: by more than 2%, partly on the back of stronger demand from abroad, improving private consumption and rising investment. However, this anticipated recovery depends on a general improvement across Europe and increasing demand for goods from overseas.

 

Inflation to decrease in 2013

While inflation has been modest in recent years, it rose to 3.3% in 2012 because of a VAT increase. However, since the end of 2012 and as the effects of that VAT increase have faded - consumer prices have begun to drop and are now in line with the Eurozone average. With lower inflation expected, and to support both domestic and foreign demand in the current difficult economic environment, the Czech Central Bank has cut the benchmark interest rate to a record low of 0.05%.

Public finances are looking better, now that the budget deficit is expected to drop below 3% of GDP this year for the first time since 2008, thanks to austerity measures taken by the former government. This should also stabilise the public debt-to-GDP ratio, which reached 48% of GDP in 2012 - up from 28% of GDP in 2007. While government debt is likely to increase further in the coming two years, the level should then stabilise at a sustainable rate. The level of foreign debt has increased since 2011, but remains modest at around 55% of GDP.

 

Bond yields have decreased

International financial markets have a generally positive view of the Czech Republic, and government bond yields have decreased sharply over the past year. There are a number of reasons for this: the European Central Banks announcement of support in the event of an escalation of the Eurozone crisis; the Czech Republics economic policy - especially that aimed at cutting the budget deficit; and the fact that public finances are now in reasonably good shape. Lower yields make it cheaper for the government to refinance its debt, and therefore lower the pressure on the public purse.

The current account recorded a small deficit of 2.5% of GDP in 2012 and is forecast to increase slightly - to 2.9% of GDP - this year. Lower exports, due to weaker demand across Europe, are offset by a similar decrease in demand for imports. As both are expected to increase again in 2014, the effect on the current account will be kept in balance.

After its high in mid-2008, the koruna exchange rate against the euro fell by around 10%. However, this was more a reflection of weakened market sentiment towards the whole Eastern European region than a negative perception of the Czech Republic itself. Since then, tensions have abated, although the exchange rate against the euro has fluctuated somewhat  over the past twelve months. Despite some vulnerability to global market sentiments, we do not expect the koruna to fall victim to extreme volatility.

 

About Crédito y Caución

Crédito y Caución has been the leading credit insurance provider for Spain's domestic and export sectors ever since it was founded in 1929. With a market share of 54%, for over 80 years the Company has contributed to the growth of businesses, protecting them from payment risks associated with credit sales of goods and services. Since 2008, Crédito y Caución is Atradius Groups operator in Spain, Portugal and Brazil.

Atradius Group is a global credit insurance company active in 45 countries, with has access to credit information on more than 100 million companies worldwide. The global operator consolidates its activity within the Catalana Occidente Group.

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