After a 4,5% increase over the past year, Czech GDP growth is expected to increase at a slower pace in 2018 and 2019, owing to adjustments in the Eurozone and domestic demand. However, atradius forecasts that the Czech economic momentum will remain in positive territory, with average annual growth rates of around 3% in the two-year period 2018-19. The increase in private consumption was driven by wage growth, declining unemployment, and favorable mortgage and loan terms. In recent years, exports have been supported by the improved international competitiveness of the country; however, labor shortages are a growing problem, with many businesses finding it difficult to fill vacancies.
Even in neighboring Slovakia this year the economy will continue its growth path with +3,2%, driven by robust domestic demand, growing investments and exports to European partners. In 2019, growth is expected to slow down slightly, settling at 2,5%. atradius it expects private consumption to continue to be a major driver of economic expansion, driven by wage increases and job growth. The unemployment rate fell from 14% in 2013 to 8% in 2017 and is expected to decline further in 2018. Inflation forecasts remain at 2% for the next two years, thus allowing real wage growth to continue. Investment growth in the country is being driven by EU funds, a growing number of projects financed by public-private sector partnerships and the construction of a new Jaguar Land Rover plant.
In this scenario, exports are expected to grow by more than 4% annually in 2018-19, mainly thanks to the prospects of the automotive industry, the demand from EU markets, in particular from Germany, as well as the productivity increase generated by FDI incoming. Furthermore, the Slovak banking sector is generally well capitalised, with high liquidity and with a declining NPL rate since 2014: this reduces the risk of negative shocks from the current domestic credit growth, which has increased faster than the Nominal GDP since 2015. Public finances are stable and the budget deficit has been kept below 3% of GDP since 2013: this year and 2019 too, it should remain around 1,5%. And Slovakia's external economic position remains equally solid.
In April 2017 the Czech Central Bank it abandoned the ceiling on the exchange rate introduced in 2013 on the crown against the euro due to the increase in inflation: the cap was introduced in order to improve the country's competitiveness, increase exports and contain deflationary pressures. In this scenario, wage increases and house price increases have led to a gradual rise in the key interest rate, from 0,25% in August 2017 to 1,25% in August 2018. Public finances remain solid thanks to income growth.
With 32% of GDP in 2017, public debt remains low compared to other countries in the region and analysts expect a further decrease in the short term. The health of public finances means that the Czech Republic should have no problems adhering to the criteria for adopting the euro: however, the issue remains controversial in the internal political debate, fueled by a contrary public opinion, where in the elections a year ago the pro-EU parties obtained only 40% of the vote. Therefore, joining the single currency in the next few years appears unlikely.
And, despite the generally favorable outlook, downside risks persist. The Czech Republic's export-to-GDP ratio (over 75%) is one of the highest in the EU and, due to its heavy dependence on foreign investment, the Czech economy remains extremely sensitive to the volatility of international trade. Furthermore, the risks come from the rapid appreciation of the exchange rate which damages the competitiveness of businesses and the sharp drop in external demand, fueled by greater political uncertainty (see the Brexit scenarios), and by the possibility of a slowdown in growth in the Eurozone.
Also in Slovakia, since the economy remains heavily dependent onexport of industrial products to the Eurozoneespecially the automotive sector, structural vulnerabilities could explode in the event of a Euro crisis and negative developments in the automotive sector, such as potential US tariffs on cars imported from EU markets: this would increase the credit risk of Slovakian companies along the value chain. Finally, other problems arise from the shortage of manpower and the reduction of the working-age population, which negatively affect the country's medium-long term growth prospects.
