Download Czech Republic and Slovakia

Czech Republic and Slovakia
Right time for structural policies
Economic growth is likely to slow slightly as European transfers are set to decline from record levels in 2015. Macroeconomic
conditions are good: low interest rates are boosting lending and reducing the cost of debt servicing. This provides an opportunity
to tackle structural problems, particularly demographic ones. It will be hard to strike a balance: policies aimed at increasing the
birth rate are costly, but if the problem is not solved, the cost in terms of pensions and healthcare could become unbearable in the
long term. Although unemployment is falling in both countries, Slovakia's unemployment rate is twice that in the Czech Republic.
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An exceptional 2015
1- Summary of forecasts - Czech Republic
After a few difficult years at the start of the decade, the Czech and
Slovak economies are now surprisingly buoyant. The Czech
Republic is Europe's fastest growing economy, expanding 4.3% in
2015 according to the European Commission, followed closely by
Slovakia, where growth was also impressive at 3.6% in 2015. 2016
looks set to be another good year, although not quite as good as
2015, with the Czech Republic expanding by 0.4% q/q in Q1 (2.7%
year-on-year) and Slovakia – by 0.8% (3.5% year-on-year). As with
GDP, industrial production growth has slowed in 2016 and March
was a particularly poor month – with output falling in Slovakia and
slowing sharply in the Czech Republic – although there was a
rebound in April. In the first four months of 2016, production rose
3.2% year-on-year in the Czech Republic and 3.6% year-on-year in
Slovakia.
Industrial production has been breaking records in Slovakia in the
last two years, with growth of 9% in 2014 and 7% in 2015. The
Czech Republic is also performing well, with industrial production
growing 5% in both years. That puts both countries among the EU's
leaders in terms of manufacturing growth, reflecting their high
competitiveness.
2014 2015 2016f 2017f
Consumer spending, which is less sensitive to EU budget funds,
rose by 3.1% in 2015 in the Czech Republic and 2.4% in Slovakia.
There are sights of moderation in the last few months. In both
countries consumption growth is not accompanied by any sign of
overheating.
Economic momentum in both countries is enabling them to continue
catching up with other EU countries. In 2010, the Czech Republic's
economic-research.bnpparibas.com
2.0
4.3
2.5
1.5
Inflation (HICP, y ear av erage, %)
0.4
0.3
0.6
1.7
Gen. Gov . balance / GDP (%)
-2.0
-0.4
-0.3
-0.5
Gen. Gov . debt / GDP (%)
42.7
41.1
40.6
40.2
0.4
1.1
0.9
0.2
60.9
67.7
74.4
70.0
54
65
80
82
5.0
5.4
6.3
6.0
Current account balance / GDP (%)
Ex ternal debt / GDP (%)
Forex reserv es (USD bn)
Forex reserv es, in months of imports
Ex change rate CZK/EUR (y ear end)
27.72 27.00 27.00 27.00
f: BNP Paribas Group Economic Research estimates and forecasts
2- Enviable momentum
Real GDP growth, %
█ EU-28
— Slovakia ▬ Czech Republic
12
10
8
Investment is by far their main growth driver, and has hit its highest
level since 2008 in both countries. In 2015, growth in gross fixed
capital formation accelerated spectacularly in Slovakia (14% versus
3% in 2014), and went from 4% to 9% in the Czech Republic.
That upturn was mainly due to record inflows of European funds. In
Slovakia in particular, EU funding resumed in 2015 after being
suspended in 2014 and reached 5.5% of GDP. The Czech
Republic's EU funding attained 3.2% of GDP. 2015 was an unusual
year for all countries receiving European funds: to avoid credits
allocated in the 2007-13 budget being cancelled, countries had to
use them before the end of 2015, which probably explains why
transfers rose so sharply. We now expect EU funding to return to
normal, which means that it is likely to grow more slowly, or fall in
Slovakia. That slowdown is already affecting investment, which rose
only 1.5% in the first quarter of 2016 and 3.1% year-on-year in the
Czech Republic.
Real GDP grow th (%)
6
4
2
0
-2
-4
-6
-8
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: EU Commission
GDP per capita (measured at purchasing power parity) was 81% of
the average in the 28-member EU, and rose to 86% in 2015.
Slovakia’s GDP per capita increased from 73% to 78% of the EUaverage over the same period.
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Inflation: around zero
Despite the unconventional policies adopted in the Eurozone,
dynamic domestic consumption and growth in wages, Slovakia's
inflation rate remains slightly below zero for the third consecutive
year. In 2015, the Eurostat harmonised index of consumer prices
(HICP) fell 0.3%, and was down a further 0.5% year-on-year in the
first five months of 2016.
Czech Republic and Slovakia
3rd quarter 2016
16
The Czech National Bank's policy of intervening in the currency
markets to weaken the koruna seems to be paying off better.
Although the inflation rate is well below the monetary authorities' 2%
target, it is still positive at 0.3% in 2015 and 0.4% in the first five
months of 2016. We can therefore expect the Czech central bank to
maintain its "weak koruna" policy in the next few quarters,
undermining the prospects for the Czech Republic to adopting the
single currency.
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... and reducing debt servicing costs ...
Low rates reduce debt servicing costs for the governments and
enable them to borrow on very attractive terms. The interest rates
that governments are paying on their domestic borrowings have hit
all-time lows, with government bond yields of 0.46% in the Czech
Republic and 0.41% in Slovakia at end-May 2016. Both countries
have the tightest yield spreads in Eastern Europe, i.e. 43bp in
Czech Republic and 45bp versus German bund in Slovakia in early
July 2016, reflecting investor confidence in their governments'
creditworthiness.
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... giving scope to tackle long-term problems
The governments of both countries have managed to restore their
financial health after difficult years that followed the 2008-09 crisis.
Budget deficits are now under control, and public debt-to-GDP ratios
are well below the 60% limit set by the Maastricht treaty, i.e. 41% in
the Czech Republic and 53% in Slovakia in 2015.
We see this improvement in fiscal metrics as an opportunity to
tackle long-term problems, first and foremost demographic ones.
The two countries have among the lowest birth rates in the EU, i.e.
1.46 child per woman in the Czech Republic and 1.34 in Slovakia in
2014, well below the 2.1 needed for population replacement.
Policies to increase birth rates will cost money in the short to
medium term. However, if the demographic issue is not solved, the
cost of population ageing in terms of pensions and healthcare could
make the public finances unsustainable in the long term. As a result,
the two governments must start working now to resolve this uneasy
equation.
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% of active population
– Czech Republic ▬ Slovakia
25
20
15
Low interest rates are stimulating lending...
Low interest rates and the two countries' fairly solid banking sectors
are boosting lending to the private sector. Both countries have seen
loan rates reaching their all-time lows (interest rates on loans with a
maturity of less than one year reached 4.1% in the Czech Republic
and 2.8% in Slovakia in May 2016). Lending is growing at a fairly
rapid pace. In the Czech Republic, it was up 8% year-on-year in
April 2016. The acceleration has been even more pronounced in
Slovakia, where banks' lending to the economy grew 11% year-onyear in April.
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2- Unemployment rates
10
5
0
00
02
04
06
08
10
12
14
16
Source: OECD
Labour market trends are similar in Slovakia where the
unemployment rate has also been falling since the peak of late 2012.
However, the joblessness rate here is more than double the Czech
level reaching 10% in April 2016.
Surprisingly, despite its considerable level of underemployment,
Slovakia is still experiencing upward pressure on wages, which
grew 5% year-on-year in real terms in Q1-2016. That could reflect a
two-tier labour market, in which some groups (the long-term
unemployed, young people without qualifications, Roma minorities)
remain locked out, while qualified young people are increasingly
migrating to other countries in search of better opportunities,
including the neighbouring Czech Republic. As a result, in Slovakia,
remittances from people working abroad equal 2.4% of GDP, as
opposed to only 0.9% in the Czech Republic. This weakness in
Slovakia's labour market is negatively impacting demographic
trends as well as the budget equation.
Anna Dorbec
[email protected]
Full employment stopped at the Czech border...
Unemployment in the Czech Republic equalled 4% of the labour
force in April 2016 and the rate has been falling steadily since late
2012, when it was 7%. As a result, the country is now close to full
employment. Upward pressure on wages is emerging, with real
wage growth accelerating to 4% annualised in the first quarter of
2016. The Czech National Bank sees in the rising real wages the
main risk for the resumption of inflationary pressures.
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Czech Republic and Slovakia
3rd quarter 2016
17