• The Czech economy unexpectedly contracted 0.6% in the fourth quarter of 2009. This followed two quarterly increases that had pulled the country out of recession. The fourth-quarter result shows that full recovery will be slow as well as fragile. Annual GDP dropped by 4.3% for 2009 – faster than the finance ministry or the central bank had predicted.
  • Finance Minister Eduard Janota predicted 2010 Czech GDP will rise 1.3%. The International Monetary Fund (IMF) also released a report on the Czech economy that forecasts 1.5% growth. The National Bank’s prognosis is for a 1.4% increase in GDP
  • Industrial production contracted by 13.4% in 2009. However, December registered an increase of 1.8% year on year.
  • Unemployment rose to a five-year high of 9.8% in January, up from 9.2% in December. Joblessness stood at 6.8% in January 2009.
  • The government adopted a programme to pave the way for euro adoption. The convergence programme calls for the budget deficit to be reduced to 3% of GDP by 2014 at the latest. (The budget shortfall was 6.6% of GDP last year.) The plan should cut the deficit by around CZK 100 billion (€3.85 billion) a year and allow the Czechs to adopt the euro in 2016 or 2017. The two main political parties have come out in favor of quicker deficit reduction: The ODS says euro adoption could take place by 2015, while the ČSSD says 2016.

 

Analysis and Forecast: Inreasing Risk

 

The current political landscape does not favour fiscal restraint. The 2010 budget is more flaccid than originally planned and budgetary discipline is rarely in fashion during a general election campaign. Worse-than-expected GDP figures hardly help. As usual, the IMF report warns that the next government will have to take courageous steps to counter the mounting budget deficit and implement health and pension reforms. The IMF stressed that any hesitation in addressing the deficit could cause international confidence to falter. Even so, the main political forces seem incapable of speaking honestly about the need for austerity in the post-election period. Of the three Central European countries that are holding elections in spring, the Czech Republic is the only place where all parties have real chance of making it into government. None of them want to risk losing votes by talking about the inevitable and unpopular tasks that lie ahead. Although both ODS and ČSSD seem dedicated to euro adoption, neither is telling voters how they plan to meet the Maastricht criteria earlier than foreseen in the convergence programme.

 

The jobless rate is approaching the critical level of 10% and further rises may occur. Industrial production remains a long way from recovery, but the December data indicates that the negative trend may be turning around. In the meantime, the Czech construction industry is unlikely to see growth until 2012, according to estimates by Euroconstruct, an umbrella group for construction-industry research agencies. Euroconstruct’s new report predicts Czech construction output will fall 0.3% this year, followed by stagnation in 2011.