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Czech economy in 2011 and outlook for 2012

Even though the Czech Republic is not a member of the eurozone, its ongoing crisis was by far the most important factor that influenced the Czech economy in 2011. This is especially true for the second half of the year, after global stock indexes dropped sharply in August, and the eurozone panic accelerated in the last quarter.

Fiscal outlook falls

The Czech government's fiscal outlook started to deteriorate in the first half of the year. In May, an analysis by the Czech Finance Ministry showed that in the first four months of 2011, the state had collected less money in taxes than planned.

Later, another study showed that the Czech budget deficit was growing faster in the first eight months of 2011 than it was in the same period in 2010.

The Finance Ministry also revised its 2011 GDP growth estimate to 1,9% from april's 2,5 %. For 2012 real GDP rowth outlook is estimated to be 1 %.

However, neither of these developments prevented the Standard & Poor's rating agency from upgrading the Czech Republic's rating by two notches from A to AA-.

 

The current account as a percentage of GDP should remain at a sustainable level. The general government balance is expected to reach −3.7% of GDP this year. In 2012, in accordance with approved consolidation strategy there should be an improvement to  –3.2% of GDP. The government debt to GDP ratio shall increase from 40.5% of GDP in 2011 to 42.2% in 2012.

 

The Czech Koruna ok

 

The average CZK/EUR exchange rate reached 24.39 in the third quarter of 2011, approximately the same value as in the first half of the year. The worsening situation on financial markets and increasing aversion to risk during September 2011 led to a gradual weakening to the value of 24.90 CZK/EUR. The Ministry of  Finance regards this weakening of the free floating Czech Koruna as positive, because it may help exporters to cope with the expected slowdown in foreign demand.

Double dip fears

 

In August 2011, amid sharp drop of global stock indexes, the world started to fear another recession, and the Czech Republic was no exception.

The fears were confirmed as Czech firms started to lose their position in the German market, and new economic indicators pointed to a slowdown. It needs to be added though that there were also strong internal factors in play.

However, even though an uncontrolled default of Greece would be devastating for the Czech Republic, the government's advisers urged it to keep calm and carry on with its reforms.

Czech banking sector healthy

 

Some sectors of the Czech economy remains healthy though, including the banking sector which would survive even a very serious recession in the EU.

This was confirmed by a stress test conducted by the Czech central bank in August.

This is also reflected by the fact that while global banks have been planning layoffs recently, Czech financial institutions announced new hirings.

One of the few exceptions was Komerční Banka (Commercial bank), an affiliate of French banking giant Société Générale. Due to its exposure to the Greek debt, its profit shrank in 2011.

Škoda has been going well

Škoda, a Czech unit of the Volkswagen automaker,  is satisfied with the trade results in 2011. It increased the number of personnel by almost 2,000 and this year is going to continue hiring. They expect an increase of production and sales of roughly 10% in 2012.

The Czech carmaker is also preparing a variety of new investments in order to boost the production and implementation of new models. 

Increasing Research Expenditure

Czech expenditure on science and research is still below the average of the EU, but the situation is improving rapidly. The largest share of the finance is invested into the research of companies opeating in the automotive industry, and in pharmaceutical and chemical production. Czech science receives 1,47% of GDP according to EUROSTAT data. In the EU member states, the amount  ranges between 0,47% of GDP in Slovakia and 3,75% of GDP in Sweeden. Among the new EU members, the situation is best in the Czech Republic and Slovenia.

There are six European centres of excellence having been approved by the European Commission and that have started being developed in the Czech Republic. It includes Extreme Light Infrastructure close to Prague, Supercomputing  center in Ostrava or Central European Institute of Technology in Brno. The EU supports all these big research  investments by 85%, the Czech government contributes by 15%. In total, the investment reaches  AUD 1 billion.


Source: Ministry of Finance, 2011