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Recently released market study: Czech Republic Business Forecast Report Q1 2014

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2014-01-05 20:22:19 - New Country Reports market report from Business Monitor International: "Czech Republic Business Forecast Report Q1 2014"

The Czech National Bank (CNB)'s decision on November 7 to intervene in the foreign exchange market has led us to adjust our expectations for the CNB's monetary policy trajectory for 2014-2015. We now expect the authorities to continue with FX intervention through the course of 2014, and to begin hiking rates in 2015. At the same time, we reiterate our view that both demand-side and supply side disinflationary pressures have run their course in Q413.

The prospects for a new left-populist party comprising the Social Democratic Party (CSSD) and billionaire Andrej Babis' ANO party should further support our expectation for heightened spending, especially on infrastructure projects in 2014-2015. This should help the gradual economic recovery, given that fixed investment has been

the weak link in the chain in the past few years. Even with fiscal targets missed, the Czech Republic is on a sustainable fiscal trajectory in the coming years due to low deficits and public debt. We reiterate our view that the country will continue to post modest current account deficits for the foreseeable future. The country's status as a regional safe haven will ensure that stable financial inflows continue to cover the country's external financing needs.

Full Report Details at
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Major Forecast Changes

Despite the Czech Republic's worse than expected economic results in Q313, the country is poised for a modest turnaround as 2013 draws to a close with leading indicators through the course of H213 signalling that the worst may be now over. Although we have slightly revised down our forecast for growth for 2013 - from -0.5% previously to -0.9% for 2013, we maintain that domestic demand is on the mend and the economy will recover more strongly from 2014 onwards.

Key Risks To Outlook

A more pronounced slowdown in eurozone economic growth and in particular in Germany would have a negative effect on the Czech Republic's economic growth trajectory. Owing to the high degree of trade integration with Germany, the Czech Republic's economic recovery remains highly dependent on external demand remaining relatively receptive to Czech exports.

Partial Table of Contents:

executive summary
core Views
Major Forecast changes
Key risks to outlook
chapter 1: political outlook
sWot analysis
BMi political risk ratings
Domestic politics
Left-populist coalition taking shape
- We now expect a coalition between the Social Democratic CSSD and the populist anti-corruption ANO 11 party to be the most likely outcome out of the elections on October 25. Given their narrow mandate in parliament, however, we expect the CSSD's plans to hike taxes on corporations and introduce progressive income taxation to be watered down.
taBle: Political overview
Long- term political outlook
Further Western integration ahead
- The Czech Republic will remain the most 'Western' of the CEE states over the next 10 years, with per capita income set to reach the level of poorer pre-2004 EU member states by the early 2020s. The country will face some key challenges, namely fiscal pressures from an ageing population, relations between Czechs and immigrant minority groups, and potential ructions with Brussels. That said, the Czech Republic will remain among the most politically, socially and economically stable countries in Europe through the next decade.
chapter 2: economic outlook
sWot analysis
BMi economic risk ratings
economic activity
a turnaround underway
- Although the Q313 growth reading looks disappointing, a recovery in Czech economic activity is already evident, with leading indicators suggesting growth will pick up speed in early 2014. We have downgraded our growth projections for 2013, to -0.9% from -0.5% previously. However, we reiterate our growth forecast of 1.3% for 2014 and 2.7% for 2015.
taBle: econoMic activity
Monetary policy
policy rate normalisation pushed Back to 2015
- We expect the Czech National Bank to continue FX intervention to maintain the currency around CZK27.00/EUR through 2014, before ending FX operations and starting to normalise its main monetary policy rate in 2015. We believe further easing in monetary conditions in 2014 (such as a shift in the CNB's exchange rate target) is unlikely, especially given that inflation, at 0.9% y-o-y in November, looks poised to return to the lower band of the CNB's inflation target at 1.0% by end-2013.
taBle:Monetary P olicy
Fiscal policy
Despite Likely Heightened spending, Fiscal outlook sustainable
- We forecast the budget deficit to arrive at 3.5% of GDP in 2013 helped by the fiscal consolidation efforts of former PM Petr Necas's cabinet. We expect the deficit to fall further within the EU-mandated threshold of 3.0% in 2015, as the country's improving economic outlook drives revenue growth, offsetting the likely heightened spending by the next administration.
taBle: fiscal P olicy
Balance of payments
Modest Current Account Deficits Ahead
- The Czech Republic will post modest current account deficits for the foreseeable future, as the country's trade surpluses will be offset by its structural income deficits. We expect these shortfalls to be covered by ample financial account inflows as the country's safe haven status will ensure high demand for Czech real and financial assets.
taBle: current account
chapter 3: 10-Year Forecast
the czech economy to 2022
effective convergence

Full Table of Contents is available at:

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