Business sentiment is improving in Czech Republic

The economic situation and outlook has improved considerably since 2009. According to the Czech Statistical Office, confidence in the domestic economy rose further in April 2010, by 3.4 points, and is now 14 points above its lowest level of April 2009. In the business sector, confidence has increased in manufacturing, trade and services. Industrial production rose 7% year-on-year in February 2010 [mainly for motor vehicles, metals and plastics], while the value of new orders increased 7.8% [mainly for motor vehicles, computers and electronics].

Despite increased unemployment [standing at 9.7% in March 2010], consumer confidence picked up again in April 2010, by 5.2 points, as people expect the economic situtation to improve in the next 12 months and do not foresee a further rise of the jobless rate. Consequently, private consumption is expected to rebound in the coming months.

Problems in the construction sector remain

That said, the construction sector remains the economy´s problem child. In February 2010, construction output decreased 23.6% year-on-year, mainly due to the adverse weather conditions last winter and the drop in new construction orders. Building construction declined 29.5%, while civil engineering performed better with only a 5.5% decrease. It is little wonder, therefore, that April business confidence in construction remained subdued in contrast to other sectors. Business failures in the construction industry increased above average last year.

Payment behaviour has deteriorated during the economic crisis, especially in the construction, transport and textile sectors, and we do not expect a major improvement in the next 6 months. According to Creditreform, corporate insolvencies rose again in February 2010 [15% year-on-year to 424 cases] with trade [a 32% share] and construction [15%] the main victims. The situation will probably not improve throughout 2010, with further rises in both business and household insolvencies expected. 

As elsewhere, many Czech companies suffer from a shortage of bank loans to finance new orders, as banks remain extremely cautious. Only a few very successful companies can obtain pre-crisis terms, while smaller and newly-established enterprises in particular still face problems. From a sector perspective, companies in textiles, transport, construction, automotive, machines, furniture and chemicals have the most difficulty accessing loans. Nevertheless, banks in general are looking at the creditworthness of individual companies, and their approach is to stay with companies with sufficient equity and with those whose commitments are so high that a rapid decrease of credits would cause losses for the banks.

The country's heavily export-oriented economy will further benefit from the recovery of some of the its major trading partners [especially the machinery, engineering and automotive-related sectors]. In February 2010, exports increased 11% year-on-year. At the same time, domestic demand is expected to rebound. After a 4.1% GDP contraction last year, current forecasts for output growth this year vary from 1.7% to 2.4%. Inflation will rise in 2010/11, due to the recovery in domestic demand [which will restore pricing power to producers] and stronger growth of nominal wages. However, it is likely to remain around the official target rate of 2%.