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Contents | Executive summary | How to obtain this publication | Additional information
The following OECD assessment and recommendations summarise chapter 1 of the Economic survey of the Czech Republic published on 24 April 2008.
Contents
The economy is growing rapidly…
the economy is benefiting from a significant pick-up in growth – on average, real GDP increased by over 6% between 2005 and 2007 and the labour market has tightened significantly. The recent global financial turmoil has so far not affected the economy although weaker growth elsewhere may have some impact. A spike in inflation is currently denting real consumption spending, nevertheless, GDP growth is expected to be about 4½% in 2008 and then to rise close to potential of around 5% in 2009. The improved economic performance is being driven by export-oriented manufacturing, reflecting further deepening of the economy’s involvement in international production chains. The implications of globalisation for the Czech economy are the subject of an in-depth review in this Survey.
Developments in real GDP
Note: Data for 2007Q4 is preliminary (top left panel). There are fourteen Czech NUTS3 regions in total (bottom left panel).
Source: Eurostat; OECD, Economic Outlook Database, December 2007; Czech Ministry of Finance, Macroeconomic Forecast, January 2008; Czech National Bank, Inflation Report, February 2008; Consensus Forecasts, February 2008.
… the inflationary risks are manageable…
There is little sign of overheating so far; underlying inflation has remained moderate and the output gap is modest. However, headline inflation is currently being lifted by several policy measures, including an increase in the lower rate of VAT and tobacco excise duty. As in other countries, developments in food and oil markets have also been increasing consumer prices. Concern that these policy and market pressures will feed through to core inflation has contributed to a phase of policy rate increases by the Central Bank since mid 2007. In addition, interest rate developments elsewhere have influenced monetary policy because exchange rate movements strongly influence Czech consumer prices. Reduction of the inflation target by one percentage point to 2% with a tolerance band of ±1 percentage points as of January 2010 is also becoming relevant for rate setting and helping to stabilise inflation expectations.
The new inflation target ties in more closely with the likely rate of inflation required to fulfil the Maastricht conditions for euro entry. The target date for entry was missed under the previous government and the current government has not set a new one. The earliest possible year of entry is now 2012. While fulfilment of the Maastricht criteria on this calendar looks feasible, leading policymakers are advocating that much deeper alignment with the euro area and further reforms are required before entry. The pros and cons of this argument are difficult to assess. But it is important that the annual report prepared jointly by the Czech Ministry of Finance and the Central Bank and approved by the government continues to provide an objective assessment of alignment and that the entry decision takes due account of the profiles of costs and benefits over time.
The new government has many plans for reform, but is backed by only a thin parliamentary majority
The centre-right coalition came into office in early 2007 following several months of political deadlock after the 2006 general election. To-date, its main achievement in economic policy has been a reform package that was voted in last year and there are many plans for further growth enhancing reforms. As for previous Czech governments, getting agreement on proposals can be slow within the coalition. In addition, putting legislation through parliament is an uphill struggle because the coalition itself has a thin majority. As a result, many of these further reforms are uncertain even though their implementation would improve Czech economic performance over the longer term.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English and in Czech language. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of the Czech Republic 2008 is available from:
- Subscribers and readers at subscribing institutions can access the online edition via SourceOECD , our online library.
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Government officials with accounts ( subscribe) can go to the "Books" tab on OLIS
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Additional information
For further information please contact the Czech Republic Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Philip Hemmings, Alessandro Goglio and Zuzana Smidova under the supervision of Andreas Wörgötter. Research assistance was provided by Margaret Morgan.
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