Economy
Macroeconomic developments in the Czech Republic in 2009/2010
In 2009 the global economy suffered the worst downturn (a fall of 0.6%) since the Great Depression of the 1930s. Although in the Czech Republic the source of the crisis was not of “domestic origin” and did not take the form of the financial crisis that struck other developed economies – here it was a matter of the secondary consequences of the crisis (due to ties with the real economy in countries affected by the financial crisis) – the consequences have been no less grave for that. There was a very marked economic downturn in the first (and in part the second) quarter of 2009, but since the second half of 2009 we can see a very slow and fragile recovery. In 2009 as a whole there was an economic downturn of 4%. Most analysts agree that output for 2010 will grow in the range 1.5-2%. According to CSO data Czech GDP in the first quarter of 2010 was up 1.1% year on year, and according to preliminary estimates the figure for the second quarter is 2.2%. However, it must be said that some of the key factors in the recovery are very fragile and risks remain (e.g. in the form of further fiscal imbalance in the eurozone, or substantial fiscal restrictions and a premature exit strategy from the measures to combat the crisis in key trading partners; or new uncoordinated and disproportionate banking regulation requirements, etc.).
The modest economic recovery since the second half of 2009 has been driven mainly by increased export demand, and subsequently by restocking inventories. However, due to the crisis capital expenditure has been very limited (expenditure on gross fixed capital formation fell 9.2% in 2009, and in the first quarter of 2010 it was down 6.6% year on year). Household consumption was also (with some delay) down (by 0.3% in 2009 and 0.5% year on year in the first quarter of 2010). Due to the persisting higher level of unemployment no marked recovery can be expected in the remainder of 2010. Given the forthcoming fiscal consolidation measures a reduction in government consumption can also be anticipated (it rose 4.2% in 2009 and 2% in the first quarter of 2010).
During 2009 foreign trade was greatly affected by the crisis (exports fell 13.8% and imports 17.7%). Nevertheless, as imports fell more markedly and exports recovered in the second half of 2009, the balance of trade surplus rose again (5% of GDP compared with 2.8% in 2008). The first half of 2010 saw a strong recovery in exports (up 15% year on year) and imports (up 15.8%), and the surplus also rose 4.3% year on year.
The economic recession has resulted in a marked decline in employment (by 1.4% in 2009, and that decline has continued in 2010) and rising unemployment, culminating at 9.9% in February 2010 (registered unemployment). At present it is fluctuating around 8.7%, but a slight seasonal increase can be expected at the end of 2010.
Following high inflation in 2008 (with an annual rate of inflation of 6.3%) there was a significant fall in the rate of inflation in 2009 (1.0%) and in some months there were trends that were almost deflationary (the second half of 2009). The CNB responded with a further relaxation of monetary policy in 2009 and in 2010. The key monetary policy two-week repo rate was reduced (most recently, and rather surprisingly, in May 2010) to its current level of 0.75% The inflation rate in July 2010 (1.9%) therefore came close to the target set at 2% since January 2010 (although the net inflation rate, which is relevant for the CNB’s decisions on monetary policy, is still just above 0%). The reduction in interest rates was projected through the transmission mechanism into the real economy (a reduction in rates on the interbank market and in lending rates) and helped ease the impacts of the crisis on the Czech economy.
The Czech currency has experienced (with a general tendency towards appreciation) a period of great volatility, primarily as the financial crisis culminated. Since spring 2009 the exchange rate has been (relatively) stable, with a modest trend for appreciation (at present the exchange rate is just under 25 CZK/EUR), although there are fluctuations (with negative consequences for decision making by economic actors). As the graph below shows, the volatility of the CZK/USD exchange rate is substantially greater than the CZK/EUR exchange rate. That is related to the links between the Czech economy and the eurozone, when a period of marked weakening of the Czech koruna against the dollar has corresponded to a weakening of the euro against the dollar (related to the Greek debt crisis in spring 2010). Discussions concerning the introduction of the euro in the Czech Republic are groundless at present, as the Czech Republic does not satisfy the basic convergence criteria.
The crisis has revealed in full the long-term structural problems in Czech public budgets. During times of economic growth structural deficits were partially offset by cyclical surpluses, so no fundamental reforms were implemented (from an economic perspective the current functioning of the pension system and healthcare is unsustainable in the long term). Nevertheless in 2009 the deficit in public finances reached 5.9% of GDP and the ratio of government debt to GDP rose to 35.4% of GDP (which in a Europe-wide comparison is a very positive figure, but the growth rate in excess of 5 percentage points is alarming). If fundamental reform measures are not adopted the primary deficit in public finances will remain higher than the convergence criterion of 3% of GDP for a long time, even though its gradual reduction is part of the government’s agenda (the target for 2010 is a deficit equal to 5.3% of GDP, and 4.6% of GDP for 2011).