Czech Republic

Politics:

• Analysis

  Czech Republic politics: Quick View - The left sets its sights on the 2014

  Event

  At its party congress on March 15th, Bohuslav Sobotka was re-elected chair of the left-wing Czech Social Democratic Party (CSSD) by a convincing majority.

  Analysis

  Alongside the re-election of the CSSD's erstwhile leader, the party laid down its new programme, which it styles as a "pro-growth" package, designed to unseat the current centre-right government at the next general election, which is due in May-June 2014. In the spirit of the Smer-led government in neighbouring Slovakia, the CSSD wants less austerity and more public spending in order to kick-start recovery in the recession-stricken economy. Its new programme promises an increase in corporate income tax; a shift to a progressive system of taxation; and the abolition of the second pension pillar.

  Perhaps the only surprise was a volte-face by the CSSD on its opposition to indirect taxation. In a move inspired by prevailing concerns about the state of the public finances and EU fiscal deficit norms, the party is no longer adamant in its demand for a cut in both rates of value-added tax (VAT). The CSSD has now indicated that it would retain the current rates for VAT (15% and 21%), despite its previous opposition to this in the government's 2012 tax reform. The party remains cautious on euro adoption, given the euro zone's financial woes, but it has pledged to institute a "better" system to regulate the flow of EU structural funds.

  Emboldened by the support for the party from the president, Milos Zeman, the CSSD is set to consolidate its status as the country's most popular political organisation. Recent opinion polls put popular support for the CSSD at 26-28%, well ahead of the ruling Civic Democratic Party (ODS).

  After the next election (irrespective of whether it is held early or on schedule), the CSSD is expected to lead a leftist government with a comfortable majority in the Chamber of Deputies (the lower house of parliament). It remains to be seen whether it will attempt to do so with the support of the Communist Party of Bohemia and Moravia (KSCM). Despite Mr Sobotka's earlier conciliatory stance on KSCM-CSSD collaboration, he appears to have backtracked on this in the days following the CSSD conference, mindful of the damage that such an alliance could wreak on the CSSD's standing as a modern, progressive party-in contrast to the KSCM, which has failed to reform since the changes of 1989.

  March 19, 2013

• Background

  Czech Republic: Key figures

  Vaclav Klaus

  Vaclav Klaus was the prime minister in 1992-97 and has been president since February 2003. He founded the Civic Democratic Party (ODS) in 1991 and led the party until December 2002, when he resigned the leadership to run for president. Mr Klaus is a divisive figure with an abrasive political style, who holds controversial, sceptical views on European political integration and climate change. His views have diverged from the official ODS position, and he resigned his membership of the party in December 2008, following the party leadership's support for ratification of the EU's Lisbon treaty. His relations with the prime minister, Petr Necas, have always been cordial, however. This will serve to underpin the government's reform effort in the early part of the forecast period. Mr Klaus will have to stand down from the presidency in 2013, after which point he is expected to retain an active interest in politics and could found a new right-wing party.

  Petr Necas

  Mr Necas, the prime minister and ODS leader, is one of the few nationally known party members untainted by scandal or perceived corruption. He is a former industrial researcher with a doctorate in physics, and a Catholic with an intellectual interest in neo-conservative social policies. Mr Necas joined the ODS shortly after its foundation in 1991 and has been a member of parliament (MP) since 1992. He served as deputy defence minister in 1995-96 and as labour minister in 2007-09. Although known for his understated political style, Mr Necas's appearances as prime minister have been confident and competent, and he has successfully steered the party through economically challenging times as the Czech Republic has slipped back into recession in 2011. As a strong critic of vested interests within his party, he is credibly placed to reform the ODS. Mr Necas's position appears strengthened following the confirmation of his mandate to lead the ODS until the regional elections in October 2012, but his power within the party could be constrained by his limited support base among the ODS's regional organisations.

  Miroslav Kalousek

  Miroslav Kalousek, the finance minister and co-founder of TOP 09, is a former leader of the Christian Democratic Union-Czechoslovak People's Party (KDU-CSL). He was elected to parliament in 1998 and became party leader in 2003, but stepped down in 2006 when the KDU-CSL rejected his proposal to form a minority government with the Czech Social Democratic Party (CSSD) with tacit support from the Communist Party of Bohemia and Moravia (KSCM). He then served as finance minister in 2007-09 under the minority centre-right government. Despite his attempts to make a deal with the centre-left, Mr Kalousek has been a long-time advocate of the KDU-CSL moving to a more pro-market stance. When his successor rejected this course, Mr Kalousek led a breakaway grouping that became TOP 09, and approached Karel Schwarzenberg, an independent member of the Senate (the upper house of parliament), to head the new party. Mr Kalousek is likely to remain the intellectual architect of TOP 09's main social and economic policies. However, a recent corruption scandal (in July 2012 a high-ranking police official accused the finance minister of intervening in a politically sensitive investigation into army procurement contracts) could undermine his position within the party in the near term.

  Karolina Peake

  Karolina Peake has been an MP since June 2010. She is a deputy prime minister in charge of the government's anti-corruption programme, a position that she has held since June 2011. Until April 17th 2012 she was a member of Public Affairs (VV). She left the party following an internal rebellion against the leadership of Radek John, the party chair (VV formally left the coalition government on April 23rd). In May 2012 Ms Peake founded a new faction called LIDEM (this acronym alludes to "the people" in Czech), which has been formally registered. LIDEM describes itself as a liberal-democratic party. The coalition government is heavily reliant on support from LIDEM to pass legislation, as its majority has been significantly weakened. Ms Peake's position as head of the new faction will afford her more political exposure and power to lobby the government in its decision-making on important policies.

  August 01, 2012

• Structure

  Czech Republic: Political structure

  Official name

  Czech Republic

  Form of state

  Parliamentary republic

  Head of state

  President; Milos Zeman, elected by direct election to a five-year term in January 2013

  National legislature

  The lower house, the Chamber of Deputies, has 200 members; the upper house, the Senate, has 81 members

  Electoral system

  Universal direct suffrage for party proportional representation, subject to a 5% threshold

  National elections

  Last elections: May 28th-29th 2010 (Chamber of Deputies); January 2013 (presidential). Next elections: May-June 2014 (Chamber of Deputies); October 2014 (Senate); January 2018 (presidential)

  National government

  The prime minister, Petr Necas of the Civic Democratic Party, leads a government comprising the Civic Democratic Party, TOP 09 and a breakaway faction of former members of Public Affairs

  Main political parties

  Civic Democratic Party (ODS); Czech Social Democratic Party (CSSD); Communist Party of Bohemia and Moravia (KSCM); TOP 09; Public Affairs (VV); LIDEM; Citizens' Rights Party (SPOZ)

  Key ministers

  Prime minister: Petr Necas (ODS)

  Deputy prime minister & foreign minister: Karel Schwarzenberg (TOP 09)

  Deputy prime minister: Karolina Peake (independent)

  Agriculture: Petr Bendl (ODS)

  Culture: Alena Hanakova

  Defence: Alexandr Vondra (ODS)

  Education, youth & sports: Petr Fiala (independent)

  Environment: Tomas Chalupa (ODS)

  Finance: Miroslav Kalousek (TOP 09)

  Health: Leos Heger (TOP 09)

  Industry & trade: Martin Kuba (ODS)

  Interior: Jan Kubice (independent)

  Justice: Pavel Blazek (ODS)

  Labour & social affairs: Jaromir Drabek (TOP 09)

  Regional development: Kamil Jankovsky (independent)

  Transport: Pavel Dobes (VV)

  Central bank governor

  Miroslav Singer

  March 15, 2013

• Outlook

  Czech Republic: Key developments

  Outlook for 2013-17

  • The two-party centre-right coalition government will continue to be supported by a newly formed liberal-democratic faction, LIDEM, in the Chamber of Deputies (the lower house of parliament).
  • The government's fiscal austerity drive has undermined its popularity and the left-wing opposition is growing in strength, increasing the prospect of an early election.
  • The Economist Intelligence Unit expects the budget deficit to shrink gradually over the forecast period. After peaking in 2014, public debt is forecast to level out at around 44% of GDP in 2017.
  • We forecast that real GDP will grow by just 0.1% in 2013, following a contraction of 1.1% in 2012, owing to the adverse impact of fiscal austerity on domestic demand, combined with faltering external demand.
  • Real GDP growth is forecast to average 2.4% in 2013-17 as the external environment and the competitiveness of the domestic economy improve.
  • Inflation is expected to moderate in 2013, falling within the 1-3% target range set by the Czech National Bank (CNB, the central bank), owing to weak domestic demand.
  • The trade account is forecast to remain in surplus in 2013-17, which will keep the current-account deficit in check, at an annual average of 2% of GDP in 2013-17.

  Review

  • The CNB voted to leave the benchmark interest rate unchanged at 0.05% on February 6th, but forex interventions remain a possibility.
  • According to the Ministry of Finance, the state budget surplus in February narrowed sharply to Kc5.6bn (US$294m), from Kc42.2bn in January.
  • Year-on-year inflation slowed to 1.9% in January 2013, from 2.4% in December 2012, owing to a moderation in energy prices.
  • Seasonally unadjusted construction output fell by 17.3% year on year and working day-adjusted industrial output fell by 5.8% year on year in December 2012, according to the Czech Statistical Office (CSU).
  • Real GDP declined by 1.7% year on year in the fourth quarter of 2012, and by 0.2% quarter on quarter, according to CSU flash estimates.
  • The current-account deficit widened to Kc24.3bn in December 2012, which pushed up the overall deficit to the equivalent of about 2.3% of GDP.

  March 15, 2013

Economy:

• Background

  Czech Republic: Country fact sheet

  Fact sheet

  Annual data	2012a	Historical averages (%)	2008-12
  Population (m)	10.5	Population growth	0.3
  GDP (US$ bn; market exchange rate)	200.4	Real GDP growth	0.3
  GDP (US$ bn; purchasing power parity)	275.7	Real domestic demand growth	-1.0
  GDP per head (US$; market exchange rate)	19,007	Inflation	2.8
  GDP per head (US$; purchasing power parity)	26,159	Current-account balance (% of GDP)	-2.7
  Exchange rate (av) Kc:US$	19.6b	FDI inflows (% of GDP)	3.1
  a The Economist Intelligence Unit estimates. b Actual.

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  Background: Czechoslovakia was founded in 1918, after the collapse of the Habsburg Empire. A communist regime was installed in 1948 and lasted until the "Velvet Revolution" in 1989. The first free election was held in June 1990, and the Czech Republic emerged in 1993 as one of the successors to Czechoslovakia.

  Political structure: Parliament consists of the 200-member Chamber of Deputies (the lower house) and the 81-member Senate (the upper house). Executive power is exercised by the prime minister. The centre-right won an unexpected victory in the election to the Chamber of Deputies in May 2010, and a right-wing coalition comprising the Civic Democratic Party (ODS), TOP 09 and Public Affairs (VV) was formed. The government was reconfigured in April 2012, following the departure of VV. LIDEM, a new political faction that includes former members of VV, was created in May and supports the ruling coalition in parliament. In October 2010 the Czech Social Democratic Party (CSSD), the main centre-left party, won a majority in the Senate, the less powerful of the two parliamentary bodies. The most recent presidential election was held in January 2013. For the first time in Czech history, the president was elected by direct public vote. A former CSSD prime minister, Milos Zeman, takes over as president from Vaclav Klaus (who was re-elected to a second term in 2008) upon the ending of his term of office on March 8th; Mr Zeman will serve a five-year term.

  Policy issues: Implementation of healthcare and pension reforms approved in 2011-12, a core plank of the government's fiscal consolidation package, will be required for long-term fiscal sustainability and to cope with an ageing population.

  Taxation: The corporate tax rate was reduced to 19% in January 2010, from 20%. A flat tax of 15% on personal income is calculated from the so-called super-gross wage, which includes social and health insurance. In 2015, in accordance with the government's recently approved tax bill, this will be replaced with a new (higher) flat rate based on gross income for all eligible taxpayers. Indirect taxes are playing an increasingly important role within the tax regime. Since January 2013 the preferential rate of value-added tax (VAT) has been 15%, applying to essential goods and services (such as food and medicine). The higher (standard) rate of VAT is 21%.

  Foreign trade: After the fall of communism, trade was reoriented. The EU accounts for about 80% of Czech exports. The current-account deficit narrowed to an estimated 2.3% of GDP, down from 2.9% of GDP in 2011, according to the Czech National Bank (the central bank), owing mainly to a sizeable trade surplus.

  Major exports 2011	% of total	Major imports 2011	% of total
  Machinery & transport equipment	55.0	Machinery & transport equipment	42.0
  Intermediate manufactured goods	17.9	Intermediate manufactured goods	18.1
  Chemicals	6.5	Chemicals	11.3
  Raw materials & fuels	3.6	Raw materials & fuels	10.8
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  Germany	32.0	Germany	29.4
  Slovakia	8.9	China	7.5
  Poland	6.2	Poland	7.1
  France	5.4	Slovakia	7.0
  Austria	4.6	Netherlands	5.6

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  March 15, 2013

• Structure

  Czech Republic: Economic structure

  Data and charts: Annual trends charts

  
  

  

  March 15, 2013

• Outlook

  Czech Republic: Country outlook

  Czech Republic: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: Since the departure of Public Affairs (VV) from the ruling coalition in April 2012, support for the government in the 200-seat Chamber of Deputies (the lower house of parliament) has fluctuated between less than 100 seats (during times of political crisis) and 105 seats. The government's parliamentary majority is therefore unreliable, but it has managed to survive five no-confidence votes so far. The coalition comprises the centre-right Civic Democratic Party (ODS) and TOP 09, and is supported by a new faction, LIDEM, composed of former VV members. Recent corruption scandals and political obstruction to government reforms--particularly the fiscal consolidation programme--have severely tested the coalition's cohesion and stability. Divisions within the coalition parties will also continue to threaten the government's stability in the short term.

  ELECTION WATCH: A former Czech Social Democratic Party (CSSD) prime minister, Milos Zeman, assumed the office of president from the incumbent, Vaclav Klaus, on March 8th following the completion of two rounds of voting in January for the first directly elected president in the country's history; he will serve a five-year term. The next election to the Chamber of Deputies is due in May-June 2014. In recent elections, the CSSD has made a comeback in the regions and the Senate. The Communist Party of Bohemia and Moravia, one of the most disciplined mainstream parties, is the CSSD's probable coalition partner, and the two together could win control of the lower house if an early election were called. The two parties have already formed several regional coalition governments following the recent local elections, and this increases the likelihood of a parliamentary coalition between them. New parties, such as Mr Zeman's Citizens' Rights Party, are also faring better in the polls and could make unexpected gains at a general election, alongside other small parties such as TOP 09, the electoral chances of which have significantly improved following the strong showing by its leader, Karel Schwarzenberg, in the January presidential election.

  INTERNATIONAL RELATIONS: Although the Eurosceptic ODS remains in power, Mr Schwarzenberg, a strongly Europhile deputy prime minister and foreign minister, has put his stamp on foreign policy. He remains opposed to the government's stance on not signing up to the new fiscal treaty on budgetary responsibility that the EU has proposed in response to the euro zone debt crisis. The government has also refused to join a euro zone banking union, which is expected to be formed in 2014. Mr Schwarzenberg, an experienced diplomat, has pursued a pragmatic foreign policy, which combines liberal economic positions in international and EU affairs with an eye to the Czech Republic's national interest. Czech-Russian relations are becoming increasingly important as more Russian foreign direct investment (FDI) flows into the country. Czech relations with Slovakia are expected to become increasingly important in strategic areas such as energy security as both countries look to develop their nuclear-power capacity.

  POLICY TRENDS: In 2013-15 the government will institute significant reforms to healthcare, social welfare, pensions and the tax system, in order to ensure the long-term sustainability of the public finances. The rules regulating pension funds are being liberalised, with an adjustment in state subsidies to encourage people to save more in private pension funds. Insurance and social welfare payments will be simplified, along with tax collection. Stricter rules will be instituted for drawing unemployment benefits, community service will become mandatory and work placements will be introduced for the long-term unemployed. Small cuts in other welfare subsidies, including sick-leave benefits, have also been agreed. The first and second phases of pension reform have now taken effect: 3% of social security contributions and up to 2% of earned wages are diverted to a so-called second pillar of newly created, privately managed pension funds, replacing the pay-as-you-go system. The implementation of the second pillar of the pension system took effect on January 1st 2013.

  ECONOMIC GROWTH: The Czech Republic has a two-speed economy: exports have propelled growth, while domestic demand has remained weak since the 2008-09 financial crisis. The country has one of the highest export/GDP ratios in the EU (over 75%), which exposes its economy to shocks in core export markets. Preliminary estimates show that real GDP contracted by 1.1% in 2012, owing to a steep drop in private consumption, as well as fiscal tightening, faltering external demand stemming from the euro zone recession, and falling fixed investment. A combination of further rises in indirect taxation, public-sector wage cuts, reduced welfare benefits and subdued real wage growth will continue to dampen consumer spending in 2013, before it picks up slowly from 2014 onwards. However, lower tax increases in 2013 than in 2012, when fiscal consolidation was top of the government's agenda, will translate into a much less harsh contraction in household consumption. This is expected to help the economy avoid recession this year.

  INFLATION: Our baseline forecast is that inflation will fluctuate within the 1-3% target band set by the Czech National Bank (CNB, the central bank) over the forecast period. In 2012 headline inflation of 3.3% exceeded the upper limit of this target band owing to a rise of 4 percentage points in value-added tax (VAT) on essential goods (from 10% to 14%), elevated food prices following poor harvests, and high regulated prices. Despite possible further rises in indirect taxation, persistently weak aggregate demand will help to dampen price pressures in 2013, particularly as prices of soft commodities gradually weaken, following an adverse food price shock in 2012. However, the recovery of private consumption after 2013, as the government relaxes its drive for fiscal austerity, is expected to buoy inflationary pressures until 2014, but the inflation rate should remain within the CNB's target range. After this point, a gradual nominal appreciation of the koruna against the euro will offset the inflationary effect of stronger domestic demand.

  EXCHANGE RATES: The koruna is expected to appreciate modestly against the euro during the forecast period. After firming against the euro in the first quarter of 2012, as regional funding markets stabilised and investor aversion to risk eased, the koruna came under pressure in the second, third and fourth quarters, owing to the Czech Republic's strong economic ties to the EU, heightened political instability and the risk of contagion from the euro zone crisis. Further monetary easing, combined with political crises, underlined this trend at the start of 2013, amid speculation about currency intervention by the CNB. Positive investor sentiment towards the Czech Republic--given its relatively low public debt, healthy domestic banking system and growing trade surplus, all of which have served to keep bond yields low--is expected to help to strengthen the koruna, especially in the second half of 2013, after the crises in the domestic economy and the euro zone bottom out.

  EXTERNAL SECTOR: The current-account deficit is forecast to average around 2% of GDP per year in 2013-17, following a significant narrowing to an estimated 2.3% of GDP in 2012, down from 2.9% of GDP in 2011, owing to weak domestic demand and a bumper trade surplus. Exports will continue to contribute positively to growth in 2013, but growth will remain modest as external demand softens as a consequence of continued recession in the euro zone. Export growth will start to recover in 2014 as trade flows with the EU start to improve. From 2015 imports are expected to rise faster than exports, as domestic demand rebounds following the relaxation of austerity measures. The trade surplus should be broadly stable for most of the forecast period, as import growth tends to mirror export growth, given the high import content of Czech goods sold abroad. As the profitability of foreign-owned firms increases and more firms reinvest their profits, the transfers surplus is expected to rise slightly as the flow of funding from the EU remains steady over the forecast period. We expect FDI financing to cover the current-account deficit in 2013-17, particularly now that the prospects for future FDI inflows have improved: the country attracted Kc211bn (around US$10.8bn) in inflows in 2012, the largest amount for five years.

  March 05, 2013

• Forecast

  Czech Republic: Country forecast summary

  Country forecast overview: Highlights

  • The Czech Republic is governed by a centre-right coalition comprising the Civic Democratic Party (ODS) and the smaller TOP 09. The ruling coalition is supported by a recently formed liberal-democratic faction, LIDEM. The government no longer commands a decisive majority in the Chamber of Deputies (the lower house of parliament), which has significantly weakened its authority and heightened political tensions.
  • The government has drawn up a new austerity package for 2013-15, covering pensions, social welfare and tax reforms, in order to ensure the long-term sustainability of the public finances. The final bill in this package, the controversial multibillion-koruna tax reform, was endorsed by parliament in late 2012 and took effect in January.
  • The Economist Intelligence Unit forecasts that the budget deficits will shrink gradually over the 2013-17 outlook period, and that public debt will remain below the EU average, despite some fiscal spillage in 2013-14 arising from subdued growth prospects, depressed household consumption and falling receipts from indirect taxation.
  • Real GDP contracted by 1.1% in 2012, owing to faltering external demand in the euro zone and the impact of fiscal austerity on domestic demand. After stagnation in 2013, growth is forecast to pick up gradually, averaging 2.4% per year in 2013-17-well below the average annual 5.6% growth achieved in 2003-07.
  • In 2013-17 inflation should stay within the 1.3% target range of the Czech National Bank (CNB, the central bank), after accelerating to 3.3% year on year in 2012 following increases in indirect taxation and persistent upward pressures on food and fuel prices.
  • The koruna will strengthen modestly against the euro for much of the forecast period. We do not expect the Czech Republic to join the EU's exchange-rate mechanism (ERM2), the two-year precursor to euro zone membership, before 2017.
  • The current-account deficit will moderate as a proportion of GDP over the medium term, owing to continuing trade surpluses as ties with trading partners in the EU and elsewhere remain strong and foreign-owned firms continue to reinvest profits in the domestic economy. Foreign direct investment inflows, which increased strongly in 2012, should finance the current-account deficit during the forecast period.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	-1.1	0.1	1.8	2.7	3.5	3.8
  Consumer price inflation (av; %)	3.3	2.1	2.0	1.8	1.5	1.5
  Budget balance (% of GDP)	-5.2	-3.0	-2.9	-2.5	-2.1	-1.8
  Current-account balance (% of GDP)	-2.3	-2.2	-2.0	-2.2	-2.0	-1.9
  Short-term lending rate (av; %)	5.4	5.7	5.9	6.0	6.1	6.2
  Exchange rate Kc:US$ (av)	19.6	18.9	19.0	18.8	18.1	17.2
  Exchange rate Kc:€ (av)	25.2	25.2	25.0	23.9	22.9	21.8

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  March 15, 2013

View detailed map

Country Briefing

Land area

78,866 sq km

Population

10.5m (June 2011, official figures)

Main towns

Population in '000 (June 2010, official figures):

 Prague (capital): 1,249

 Brno: 371

 Ostrava: 335

 Olomouc: 232

 Ceske Budejovice: 187

 Plzen: 186

 Liberec: 170

Climate

Continental (warm summers and cold winters)

Weather in Prague (altitude 254 metres)

Hottest month, July, 17.9°C (average daily temperature in 2008); coldest month, December, 0.7°C (average daily temperature in 2008); driest month, February, 27 mm average rainfall; wettest month, July, 86 mm average rainfall. Annual average rainfall in 2008, 619 mm

Language

Czech (Slovak officially recognised)

Weights and measures

Metric system

Currency

Koruna ceska (Kc) or Czech crown. Introduced in February 1993 after the break-up of the monetary union with Slovakia

Fiscal year

Calendar year

Time

One hour ahead of GMT in winter; two hours ahead in summer

Public holidays

January 1st (New Year), Easter Monday, May 1st (Labour Day), May 8th (Liberation Day), July 5th (St Cyril & St Methodius), July 6th (Jan Hus Day), October 28th (Independence Day), November 17th (Freedom and Democracy Day), December 24th-26th (Christmas)

January 04, 2013