OECD Economic Outlook, Volume 2019 Issue 1

Czech Republic

Economic growth will remain robust in 2019 and 2020, although slowing to around 2½ per cent. Household consumption will grow fast thanks to growing wages and social benefits. Government spending and private investment will also contribute to growth. Labour shortages and weaker demand from trading partners will restrain growth in 2020.

Monetary policy tightening is projected to continue in 2019 and 2020 to keep inflation close to the 2% target of the central bank. If inflation turns out to be higher than projected, monetary policy tightening would have to be stronger. The fiscal surplus is decreasing mildly on the back of fast spending growth, but public debt is set to decrease further to a record low. Improving transport infrastructure and regulations, lifting barriers to entry in professional services and increasing female participation in the labour market would help to boost potential growth.

Growth remains strong

The economy remains strong, supported by domestic demand. Although slowing somewhat, household consumption growth will remain robust, driven by high wage growth and employment. On the supply side, strong construction and manufacturing activity are driving production and investment, more specifically, in railway infrastructure. Exports of cars, an important segment of the economy, keep increasing, but overall export growth is slowing as external demand is weakening. This has led to a softening of business confidence, which is expected to slow investment. The labour market remains tight, constraining growth, in particular in sectors like construction. The number of job vacancies has stabilised but remains high, contributing to strong wage growth.

Inflation and business confidence: Czech Republic

Source: Czech Statistical Office; and OECD Economic Outlook 105 database.

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Czech Republic: Demand, output and prices

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Investment in infrastructure and training is necessary

Inflation has picked up recently, but is projected to converge slowly toward the 2% target of the central bank. The Czech National Bank is expected to continue to increase interest rates progressively while limiting spreads with the euro area. Further appreciation of the koruna would offset domestic inflation pressures.

Although gradually declining due to strong public spending growth, the primary fiscal balance will remain in surplus and government debt will decrease further. The Czech Republic can use part of the fiscal space to increase potential growth. Investment in transport infrastructure is needed, in particular in roads and railways to better connect the country with important neighbouring trading partners. Developing more high‑quality childcare and pre-school facilities would increase the participation of women with young children in the labour market. Moreover, increasing the flexibility of jobs through better enforcement of the right to part-time work, as well as promoting flexible teleworking arrangements and shared jobs, can facilitate the return to the labour market after family-related breaks.

The tight labour market, in the context of an ageing population, calls for bolder policies to increase labour supply. Increasing resources for education can help to reduce important skill mismatches. More specifically, vocational education should be further developed. Stronger involvement of employers in the design of curricula and internships would help to align training with labour market needs. Accelerating immigration procedures and facilitating immigrants’ integration, including through language classes, would help ease labour market tensions in the short run.

Growth is projected to remain robust

GDP growth is projected to remain strong over the projection horizon, but to slow somewhat to 2½ per cent, due to weaker exports, business confidence and investment, as well as labour shortages. A tight labour market will continue to boost wage growth and consumption. Exports and economic growth could slow more sharply than projected should the abrupt growth deceleration in Germany, a major trading partner, be stronger and deeper than expected. The economy is highly integrated into European value chains and would be hit disproportionally, should trade disputes escalate. Moreover, higher‑than‑expected inflation is possible and would accelerate interest rate increases. On the other hand, structural reforms to ease labour market mismatches could sustain a stronger expansion for longer than expected.