Why to invest in the Czech Republic - CzechInvest

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KEY FACTS

Area	78,864 km2
Population	10.5 million
Labour force	5.3 million
Capital	Prague
Language	Czech
Currency	Czech Koruna (CZK)

 

The Czech Economy in 2012 and Forecast for 2013

During the whole 2012, the Czech economy was probably experiencing a shallow recession, from which it is expected to emerge at the beginning of this year. However, economic recovery should be only gradual, with GDP increasing by mere 0.1% YoY. In 2013, the economy should continue to be driven by balance of goods and services surplus, though the positive contribution of net exports should be counterbalanced by a negative contribution of gross domestic expenditures. The forecast for GDP and its expenditure components is influenced qualitatively by the high level of uncertainty regarding external developments relating to the Czech economy and the impacts of fiscal consolidation of public finances.
We expect consumer prices to grow by 2.1% in 2013, while in 2014 the average inflation rate should reach 1.8%. Therefore, in both years it should be near the CNB inflation target. We consider the risks of both inflation acceleration and deflation to be low. This year, the growth of consumer prices will be significantly influenced by a 1 p.p. hike in both VAT rates, effective from 1 January 2013. In 2012, fiscal effort (defined as a YoY change in the balance adjusted for the impact of economic cycle and one‐off and temporaryoperations), due to deepening of the negative output gap induced by recession, probably achieved 1.0 p.p. A change in the estimate for 2012 was made in the structure of income and expenditure items. On the revenue side, the expected revenue from VAT was modified due to a decline in household consumption. Together with a decrease in the estimate of social security contributions, this amounts to 0.3% of GDP. On the contrary, in case of corporate income tax, expectations are by 0.1% of GDP more positive. Long‐term interestrates in Q4 2012 continued to decrease (to 2.1% on average per quarter), whereby once again historical lows were shifted. On average for the duration of 2012, yields to maturity of 10‐year government bonds for convergence purposes reached 2.8% (versus 2.9%). We estimate that in 2013 the longterm interest rates will fluctuate around 2.2% (versus 2.7%). They should also remain at similarly low levels (2.3%) in 2014.
Considering developments over the last year, we have adjusted the assumption on the trend trajectory of the exchange rate. In 2013, the average rate should reach 24.9 CZK/EUR, further on the koruna should be appreciating by 0.5% per year on average. In Q4 2016, i.e. on the horizon of the outlook, the exchange rate should reach on average 24.5 CZK/EUR.
On 1 January 2013, the pension reform came into force incorporating the act on pension savings and the act on supplementary pension savings that ensured the second pillar creation and at the same time transformation of the third pillar of the pension system. The newly created second pillar is financed by releasing a part of premiums for pension insurance from the first pillar, whereby the insurance rate for the first pillar of the participant of the second pillar has decreased by 3 p.p., while the participant has to add another 2 p.p. from his or her own funds. Insured persons may decide on this release prior to reaching the age of 35 years. Insured persons who are older than 35 years at the moment of launching the reform can opt out of the pay‐as‐you‐go system no later than on 30 June 2013. Upon making their decision or when the time‐limit elapses, however, it is no longer possible to change their decisions.

Source: Macroeconomic Forecast of Ministry of Finance, October 2012

 

Export Destinations in 2011 (share of total exports)