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2.
Macroeconomic development
2.1.
Performance of economy
 In 2007 GDP
growth rate reach
record highs
In 2007, GDP increased by 6.5% in real terms to reach its record growth rate in the
new history of the Czech state. For the third year in a row the economic growth rate
stands at 6.4% which is the yearly average and the CR thus joined the group of
countries showing fast growth rates. Whereas the growth rate of GDP was in the CR
by 3.6 p.p. higher than in the EU 27, the gap between the average economic level in
the CR and that in the EU 27 countries narrowed. Based on the extrapolation the
CZSO estimated that the Czech Republic would reach in 2007 82% of the EU 27
level measured by the volume of GDP per capita in purchase power parity.
Moreover, in 2007 conditions contributing to the economic growth were not that
favourable as in 2006. Interest rates were increasing, cost competitiveness was
reduced due to the strengthening of the CZK and prices of energy sources were
raising. On the other hand, favourable conditions of economic growth included
mainly the return of terms of trade to positive values and implementation of
favourable effects coming from the inflow of foreign capital. In 2007, positive change
was recorded in relation between the GDP growth and the gross domestic income
(GDI). Favourable development of terms of trade resulted into the GDI growth in real
terms by 7.5% which was by 1.1 p.p. more than the growth of GDP. Gross national
disposable income in 2007 increased by 5.2%. Its growth was smaller compared
with economic indicators of GDP and GDI mainly due to bigger outflow of net
primary income from the Czech Republic to abroad.
Graph 2.1.1
Gross domestic product, gross domestic income (current prices in 2000) and terms of
trade (y-o-y change in %)
10
gross domestic product
gross domestic income
terms of trade
8
6
%
4
2
0
-2
-4
-6
2000
2001
2002
2003
2004
2005
2006
2007
Source: CZSO
Graph 2.1.2
Gross domestic product 1
(y-o-y change in %, constant prices
2000)
EU 15
6
Gross domestic product in PPS
per capita 2 (EU 27=100)
120
EU 27
7
Graph 2.1.3
100
CR
5
Germany
80
%
4
60
3
2
40
1
EU 15
Slovakia
20
0
-1
CR
Hungary
Poland
0
2000
2001
2002
2003
2004
2005
2006
2007
Source: Eurostat
2000
2001
2002
2003
2004
2005
2006
2007
Source: Eurostat
 Household and
state debts grew
The fact was that high economic growth brought besides positive effects in relation
to the growing standard of living also negative effects such as growing external and
government debt and increasing indebtedness of the population.
 Positive
production gap
widened
In 2007, and especially in Q4 and then in the first months of 2008 elements
signalling, as a rule, future changes in the GDP growth started to appear in the
economic development. The use of production capacities in industry increased to
reach 88% while the long-term development fluctuated around 85%. Gradually
increasing positive production gap between the real GDP and potential product
estimated by the OECD for 2007 in the amount of 1.5 p.p. signalled also an
excessive utilisation of production capacities and the existence potential risk of
increasing inflation pressure. An accelerated growth of financial reserve to doubledigit figures showed an excessive credit supply which also created conditions for an
increasing inflation. An important trend change was registered in all price circles
concerning world market prices, producer and consumer prices. Price increase in Q4
2007 and in the first months of 2008 rank among the most marked since 1998. The
drop of stock market index exceeding 20% in the period October 2007 to March
2008 signalled an anticipated worsening of the economic situation in the future.
Demand and its components
 Household
consumption
speeded up
1
2
The household demand components showed in 2007 differentiated growth rates
contributing thereby differently to the GDP growth. Household consumption speeded
up from 5.4% in 2006 to 5.7% in 2007 and, at the same time, markedly exceeded by
2.2 p.p. the average reached in the period 2001 – 2006, contributing also largely to
the GDP growth (2.7 p.p.). The growth of household consumption was supported by
the real wage growth (4.4%), more intensive use of the population saving and
increased consumer credit supply. Obviously, the population did not expect
worsening of the economic situation in the years to come. Households debts
increased, y-o-y, by more than a third while mortgage loans for housing advanced
consumer credits. These processes reflect the wish of the population to have own
dwelling and also the existence of negative interest rates depreciating savings.
International comparison showed that the share of household consumption in the
GDP fluctuate around 50% for many years and is falling behind the EU average
which makes approximately 60% of the GDP.
Data for the CR for 2007 were registered as preliminary estimate.
Data for 2007 were preliminary estimate.
Total household demand 3
(y-o-y change in %, s. c. 2000)
Graph 2.1.4
Graph 2.1.5
7
EU 27
CR
6
CR
EU 15
7
EU 15
Germany
Household consumption
(y-o-y change in %, s. c. 2000)
OECD
Germany
6
5
5
4
4
3
2
%
%
3
1
2
0
1
-1
0
-2
-1
-3
-2
2000
2001
2002
2003
2004
2005
2006
2007
Source: Eurostat
 Favourable
investment
conditions
prevailed
2000
2001
2002
2003
2004
2005
2006
2007
Source: OECD
Investment activity in the last three years intensified. In 2007, the gross fixed capital
formation increased by 6.1% to exceed by 2.1 p.p. the average reached in 2001 –
2006. There were several reasons, e.g. favourable investment climate in Europe
especially in Germany where investment in 2007 increased by 4% and exports by
8.5% and the CR could thereby benefited from this investment and export wave.
Among further causes of the investment process acceleration belonged a marked
increase of profit growth rate which was by a third more in many industries
compared to the previous year. An important determinant was an inflow of direct
foreign investment. In 2007, the FDI was CZK 185 billion which was the highest
value reached in the period 2000 to 2007. The scope of direct foreign investment
inflow formed a background for the growth of future potential product.
Interest rates despite certain increase were not that high and were affordable to
small and medium-size Czech companies. This was contributed to also by the fact
that interest rates on credits were lower than those in the Eurozone countries.
Material structure of the fixed capital remained unchanged in the period 2003 –
2007. The share of machines in the total investment in the amount of 50.5% was
only slightly higher than the share of constructions. No changes took place in the
internal proportion of investment into machinery between machinery and transport
equipment, either the proportion between housing investment and investment to
other constructions and buildings.
3
Data for 2007 were registered as preliminary estimate. Inconsistency of data for the CR in 2007 is given by different
sources.
Graph 2.1.6
Gross fixed capital formation 4
(y-o-y change in %, constant prices
2000)
Graph 2.1.7
8
Rate of saving and rate of
investment (in %, current prices)
gross national saving rate
rate of investment
32
6
30
4
28
0
%
%
2
-2
EU 27
26
24
EU 15
-4
CR
-6
Germany
-8
22
20
2000
2001
2002
2003
2004
2005
2006
2007
Source: Eurostat
 Investment
expenditures in
2007 were more
effective
2000
2001
2002
2003
2004
2005
2006
2007
Source: ČZSO
Contribution of the gross fixed capital formation to the GDP growth in the period
2005-2007 increased to reach in 2007 1.5 p.p. Effectiveness of investment increased
(as the number of units converted to the GDP increased per unit decreased) from
16.1 in 2002 to 4.5 in 2007. Investment rate excess over the gross national saving
rate dropped which was also a base for the external economic imbalance
improvement.
The international comparison shows that the investment rate is almost 1/3 higher
than the average investment rate in the Eurozone which is reasonably stabilized and
fluctuates around 20% of the GDP. The gap between the investment rate in the CR
and the rage in other countries can be to a considerable extent explained by
processes of convergence when medium-developed economies reduced the gap
between their economic level and that of the developed countries.
 Record year for External trade reached in 2007 the best result for the period of existence of an
external trade
independent CR. At current prices it applied to a record excess of the value of
exports over imports. Results were affected mainly by the ongoing high growth rates
of industry, more favourable development of terms of trade, inflow of direct foreign
investment and the decrease of the mineral fuel import.
Contribution of net exports to the GDP reached its record high 4.8 p.p. in 2005. In
2007 the contribution was 1.1 p.p. exceeding thus the long-term average in the
period 2001–2006, i.e. 0.5 p.p. thanks to the increase of goods and services export
performance recorded for three years in a row. In 2007 the import of goods and
services increased by 14.5%.
4
Data for the CR in 2007 were registered as preliminary estimate.
Graph 2.1.8
Contributions of demand components to the GDP growth (percentage points, constant
prices 2000)
6
5
4
p. p.
3
2
1
0
-1
-2
-3
2001
2002
2003
final consumption expenditures
2004
2005
gross capital formation
2006
2007
net exports
Source: CZSO
Supply components
In the period 2000 to 2007 the sector structure of economy (in the form of share in
 Secondary
sector strengthened the total gross value added in current prices) showed as volatile. Position of primary
its position
sector (agriculture and fishing) improved in 2007 compared with 2006 by 0.2 p.p.
Compared with the average in the period 2001-2006 it improved by 3.2% but as early
as since 2005 its importance began to drop. The share of secondary sector (industry
and construction) after two years of weakening increased to 38.4 % and strengthened
thereby its position compared also with the medium term average (37.5%). Tertiary
sector of services dropped compared with 2006 by 0.5 p.p. and its average for the
period 2001-2006 made 59.3%. In the medium-term development secondary sector
strengthened to the detriment of primary and tertiary sectors.
Table 2.1.1
Share of industry in the gross value added (current prices)
Sector
Agriculture, fishing
Industry, construction
Services
2000
3.9
38.1
58.0
2001
3.9
37.7
58.4
2002
3.3
36.7
60.0
2003
3.1
35.9
61.0
2004
3.3
38.6
58.1
2005
2.9
38.2
58.9
in %
2006
2007
2.6
2.8
38.1
38.4
59.3
58.8
Source: CZSO
 Manufacturing
sustained its high
performance …
Manufacturing increased, y-o-y, by 7.9%, on average in the period 2001-2006. In
2007 the increase reached the above average value of 11%. Trend of big growths
was started up as early as in 2004, and the biggest growth was reached in 2006
exceeding 18%, y-o-y. High growth-rate of performance (gross value added) in
manufacturing was affected by growing capacities, labour productivity and capital in
the period 2005-2007 and also by the labour force increase.
 … and was
increasingly
specialized
The on-going specialization of industry continued. The subject structure of
manufacturing consists mainly of manufacturing of machinery and transport
equipment whose share in total gross value added at current prices increased from
8.6% in 2000 to 13.3% in 2006. Fast growing shares in the industrial structure were
recorded for manufacturing of metal structures and fabricated metal products (from
9.4% to 10.8%), manufacture of machinery and equipment (from 9.6% to 10.8 %),
manufacture of electrical products and rubber and plastic products (from 4.8% to
7%).
Development of contribution to the gross value added in manufacturing – selected
industries (current prices)
Graph 2.1.9
Manufacture of four-wheelers
Manufacture of electrical equipment
Manufacture of machinery and equipment
Manufacture of metal structures and metal products
Manufacture of other mineral products
Manufacture of rubber and plastic products
2000
2006
Manufacture of chemical products
Manufacture of food, beverages and tobacco
0
2
4
6
v%
8
10
12
Source: CZSO
 Financial
intermediation and
trade dominated in
services
In services, the divisions retail sale, maintenance and repair of motor vehicles and
financial intermediation and insurance both growing in the period 2001-2006 by
6.0%, y-o-y, ranked among divisions with the highest average growth rates, followed
by transport, storage, and communication with annual average growth by 4.6%.
These divisions followed this trend also in 2007 when retail sale, maintenance and
repair of motor vehicles, financial intermediation and insurance speeded up to a
double digit y-o-y growth by 12.1% and 13.7%, respectively. Division transport,
storage and communication increased its performance by 8.4%.
 Share of
services is low
according to
international
comparison
International comparison of the value added showed differences in proportions of
main sectors between the Czech Republic and advanced countries. This mainly
applies to differences between the shares of industry incl. construction and the
service sector. While in the advanced countries the share of services made
approximately 70% and continues to grow, in the CR higher share of services was
registered in 2003 (61%) and in 2007 it dropped to 58.8%. Following the trend of he
advance countries recorded for the last two decades when the economic growth
was accompanied by the change of the supply structure for the benefit of services
was thereby interrupted. This development trend is important from a few aspects. It
corresponds not only to changes in consumption of the population in respect of
service sector with high demand such as education, healthcare and science and
research. In addition, the service sector is less demanding in terms of energy and
material and is less sensible to the business cycle downward trend.
 Services
contributed
markedly to the
GVA growth in real
terms
The growth of gross value added in real terms by 6.4% was most contributed to by
the service sector. The gross value added formation in services markedly
contributed to the growth of total gross value added in 2007 in the amount of 4.6 p.p.
which was by 2.5 p.p. more than its average in the period 2001-2006. More than a
half of the contribution came from trade, hotels and restaurants and transport
(2.5 p.p.). The industry and construction sector contributed by 2.1 p.p. in 2007 which
almost corresponded with the medium-term average 2.2 p.p. while the
manufacturing contributed by 3 p.p. last year and construction by 0.1 p.p.
Contribution of agriculture to the growth of gross value added in 2006 fell into
negative figures. The average in the period 2001-2006 made 0.1 p.p., in 2007 –0.4
p.p.
Growing labour
productivity in
industry
In the observed period two stages of development can be traced in the labour
productivity in agriculture. In the period 2001 to 2005 labour productivity in
agriculture recorded an upward trend but since 2005 it recorded a drop. The most
marked fall of labour productivity in this sector occurred in 2007 by more than 11%,
y-o-y. This unfavourable development might come from the GVA drop. The on-going
acceleration of growth rates of labour productivity was recorded in industry (inc.
construction);°in 2007 labour productivity in this industry increased by 6.5%, y-o-y.
By almost the same value (6.4 %) increased labour productivity in services, y-o-y.
Although it did not grow so fast as in industry it developed on slightly growing
trajectory.
14
Graph 2.1.10
6
Contributions of sectors to the
GVA growth (percentage points,
constant prices 2000)
4
p. p.
Labour productivity in sectors
(to GVA, index 2000=100)
160
agriculture, fishing
industry, construction
services
5
Graph 2.1.11
150
agriculture
140
services
industry
130
3
120
2
110
1
100
0
90
-1
80
2001
2002
2003
2004
2005
2006
2007
Source: ČZSO
2001
2002
2003
2004
2005
2006
2007
Source: CZSO
Resources of economic growth
 Above-average
contributions of
resources from the
medium-term view
Primary sources of economic growth include employment, net fixed capital reserves,
labour productivity and productivity of capital. Development of contributions of these
sources was in the period 2000-2007 considerably affected by business cycle
development. In 2006, contributions of intensive sources slightly shrank and, in
contrast, extensive sources recorded an intangible increase. In 2007, intensive
sources contributed more while extensive stagnated. In the medium-term
comparison, most contributions in the last year reached the above-average values.
 Contribution of
employment
continues to show
high level
Employment5 in 2007 increased, y-o-y by 1.8% which was, compared with the
average in the period 2001-2006, by 1.3 p.p. more. In the labour market new jobs
were created due to higher labour demand. Simultaneously, fast growth of labour
productivity acted to the contrary. Relatively low average growth of employment was
contributed to by y-o-y decrease of employment in 2003. Contribution of employment
to the GDP growth was in the period 2001-2006 0.3 p.p. and from this medium-term
view the contribution of employment in 2007 in the amount of 1.1 p.p. can be
considered as much more than above-average.
 Economic
growth was most
contributed to by
labour productivity
Labour productivity in the period 2001-2006 increased by the average y-o-y growth
rate in the amount of 3.8%, however, its growth was uneven. In 2007, high dynamics
of growth (+4.6%), y-o-y, continued, although compared with the previous year it
showed a moderate decline. Contribution of labour productivity to the GDP growth
has been increasing since 2002 to reach 2.9 p.p. in 2007 which value significantly
advanced the average reached in the observed period (2 p.p.). One of important
factors of this growth was a massive growth of investment increasing the capital-toGDP ratio.
International comparison of labour productivity per employee suggests that the
Czech Republic in 2007 reached 73% of the EU 27 average. In the period 20012006, labour productivity per employee squeezed the difference in relation to the
EU 27 by 1.5 p.p. on average, in the last year this value was exceeded by 0.7 p.p.
As regards labour productivity per hour worked the Czech Republic showed worse
results in international comparison. It should be noted that the comparative level was
higher since the EU 15 was the base. In this indicator the CR reached in the last
year only 53% of the EU 15 level. However, even in this indicator the CR showed an
improvement and the difference in relation to EU narrowed by 1.5 p.p., y-o-y.
5
Data on employment were used from data on annual national accounts due to their comparability with data on gross
domestic product and net fixed capital reserve.
Labour productivity – GDP in PPS
per unemployed person
(EU 27=100)
Graph 2.1.12
120
100
110
90
100
80
90
Labour productivity – GDP in
PPS per hour worked
(EU 15=100)
Graph 2.1.13
70
80
60
70
50
60
40
50
40
30
2000
2001
2002
EU 15
2003
CR
2004
2005
2006
Slovakia
2007
2000
2001
2002
EU 25
Poland
2003
CR
2004
2005
Slovakia
Source: Eurostat
2006
Poland
Source: Eurostat
 Contribution of
the fixed capital
reserve did not
change in the
medium term runt
Growth of next fixed capital reserve 6 in the period 2001-2006 reached annually
1.6% average while in 2007 it rose by the same value. Thanks to this more or less
stabile development and compared with other resources the value of tangible fixed
capital contribution did not show many changes. In the last year it contributed by
0.6 p.p. to the GDP growth which corresponds with the average value reached in the
observed period.
 Labour
productivity also
contributed
markedly to the
GDP growth
In the productivity of capital (net fixed capital reserves) in the period 2001-2006 an
average annual growth of 2.5% was recorded. In 2007 the y-o-y growth of the
productivity of capital almost doubled (4.8%). The average contribution of the
productivity of capital to the GDP growth made 1.3 p.p. in the observed period. This
low value was mainly affected by markedly low contributions in the years 2001 and
2002. The year 2007 was in the mid-year view classified as above-average since the
contribution of the capital to the GDP growth made 1.9 p.p.
Graph 2.1.14
Contributions of production factors to the GDP growth (percentage points, constant
price 2000)
4
3
p. p.
2
1
0
labour productivity
employment
-1
capital productivity
net fixed assets
-2
2000
2001
2002
2003
2004
2005
2006
2007
Source:CZSO
6
Time series of the net fixed capital reserve was available until 2005 and this is why its value was extrapolated for the
coming years.
2.2.
Macroeconomic balance
Following the increase of external imbalance of the Czech economy in 2006 an improvement was
recorded in 2007 owing mainly to robust economic growth. Even more marked was the reduction of internal
balance measured by indebtedness in the public finance sphere where the reduction of proportional
government sector deficit as well as the government debt was recorded. Such development of external and
internal balance measured by relations of the balance of payment current account surplus or the deficit of the
Czech government sector showed an improvement of the relation between the development of real economy
and monetary and fiscal development. The imbalance between material and financial flows which became
apparent in 2006 was to a certain extent reduced.
Low imbalances along with robust economic growth and surviving relatively low inflation rate are
basic foundations explaining partly the appreciation of CZK to the leading world currencies.
External balance
External position of
the Czech economy
strengthened in
2007 …
The balance of payment current account deficit in 2007 was reduced to 2.5% of the
GDP. This owed to the improvement of both the nominal amount of the current
account surplus and robust growth of the Czech economy. In nominal terms the
current account deficit shrank from CZK 100.8 billion in 2006 to CZK 89 billion in
2007, robust real growth of economy by 6,5% (from 6,4 % in 2006) recorded a
nominal increase of GDP by CZK 326 billion. The impact of economic growth was
decisive – unless the economy grew markedly the share of the current account
deficit in the GDP deteriorated by 1.3 p.p., y-o-y.
The financial account surplus in 2007 exceeded a little a hundred billion limit (CZK
104.5 billion) to be almost the same as in 2006 (CZK 104.9 billion). This level was
sufficient to cover the current account deficit.
… to reach the
second best result
for the last seven
years
Graph 2.2.1
Also in the long-term context from 2000 to 2007 current position of the CR as
regards its balance is favourable - in the above years the proportional deficit made
4.6% of GDP on average. The year 2007 is classified as the best of the last seven
years. The result of external balance was, however, in 2007 like in a few previous
years affected by significant structural changes on the balance of payment current
account.
Development of main items of the balance of payment current account of the Czech
Republic (surplus, in CZK billion)
2001
2002
2003
2004
2005
2006
2007
150
100
50
0
-50
-100
-150
-200
-250
current account
current transfers
balance of revenues
balance of services
trade balance
-300
Source: CNB
 External
balance is
continuously
supported by
positive results of
external trade in
goods and services
The on-going trend of performance balance improvement in terms of its final surplus
culminated in 2007. The trade in goods and services reduced the external balance
of the Czech economy and the deterioration of balance is, on the other hand,
contributed to increasingly by the balance of income.
Just the last five years show a very positive development – if the surplus of the trade
with goods and services made approximately CZK 64.5 billion on average in 20032007, then the position in 2007 results not only from the absolute value of the
performance balance surplus (CZK 172.9 billion) but also from the fact that its value
in 2007 is the best result in history from 1993. Over the last seven years the result
for 2007 was even more marked. If in the period 2000-2007 was the performance
balance positive and made CZK 18.5 billion (until 2003 the performance balance
was negative due to the deficit of the external trade with goods), the year 2007
recorded a surplus by 9.3times higher than the long-term average.
 Performance
balance to the GDP
increases rapidly
The Czech economy benefits from accumulated income coming from direct foreign
investment in exports. While in the period around the end of 2000 imports in relation
to these investment deteriorated the trade balance and thereby also the current
account, remelting of their effects into export performance of the country
contributed, on the other hand, – besides the entry to the common European space
– to the reduction of the current account imbalance. The performance balance
surplus made in 2007 4.9% of GDP while in 2006 only 3.3% of the GDP. i.e. almost
the same as in 2005 (3.2%). In 2004, when the performance balance was positive
for the first time its surplus made only 0.1% of nominal GDP.
 Current
transfers in negative
figures due to
payments to the EU
In spite of very high dynamics of performance balance surpluses – incl. mainly in
external trade with goods – its surplus in 2007 was not enough to cover the drop of
revenue balance. The difference in the amount exceeding CZK 80 billion was
unable to cover even the current transfer results which are since 2006 also in
negative figures due to mandatory payments to the EU budget.
Graph 2.2.2
GDP growth and external
imbalance
(current prices)
Graph 2.2.3
12
Covering the current account
balance by the financial account
balance (in CZK billion)
400
covering of current account by
financial account
current account deficit
10
300
financial account surplus
8
200
6
4
100
2
0
0
2000
2001
2002
2003
2004
2005
2006
2001
2007
nominal GDP growth rate
-100
share of the balance of payment current account deficit in
nominal GDP
-200
Source: ČNB, ČZSO own calculations
 External
balance is
weakened by
unfavourable
income
2002
2003
2004
2005
2006
2007
Source: ČNB, ČZSO, own calculations
In 2007, the balance of income recorded the biggest deficit ever in the amount of
CZK 253.8 billion. Over 7% of nominal GDP outflows from the Czech Republic as
net outflow of the balance of income money, the outflow itself in nominal terms in
2007 was nearer to the amount of CZK 400 billion – of which CZK 108.8 billion were
dividends of the foreign companies owners in the CR. Deficit of the balance of
income exceeded in 2007 almost 1.8times the short-term average for the period
2000-2007 (CZK 142.4 billion).
The fact that the balance of income in the long term trend widens the deficit of the
balance of payment current account and thereby affects unfavourably the external
balance of the Czech economy is obvious as early as since 1993. During the last
five years an extremely fast acceleration of this negative trend was recorded – if in
2000 the negative balance of income contributed to the current account deficit by
51% and in 2003 by 75%, then, beginning from 2004, the deficit of the balance of
income makes multiples of the current account deficit as shown in Table 2.2.1
providing an analysis of contributions of individual components of the balance of
payment current account in the period 2000-2007.
 Reinvested
profits exceeded
dividends
Graph 2.2.4
As it is clear form the graph 2.2.4, in 2007 the volume of dividends repatriated to
countries of foreign owners of Czech companies increased in volume less that the
volume of profit reinvested to the Czech economy. Investment made by the Czech
companies in abroad in 2007 reached CZK 27.1 billion of which own capital inputs
and reinvested profits made CZK 15 billion. However, compared to the year 2006
(CZK 33 billion) the Czech direct foreign investment was lower).
Dividends and reinvested profit in Graph 2.2.5
the CR (in CZK billion)
140000
Outflow of money in form of
wages (income and costs in CZK
billion)
80000
dividends
reinvested profits in the CR
120000
income from residents´work abroad
70000
100000
60000
80000
50000
costs of non-residents´work in the CR
40000
60000
30000
40000
20000
20000
10000
0
0
2000
2001
2002
2003
2004
2005
2006
2007
Source: ČNB
2000
2001
2002
2003
2004
2005
2006
2007
Source: ČNB
 Outflow of
money in form of
wage compensation
to employees
Continuous deterioration of the balance of income is not impacted only by the
repatriation of profit but also by widening of differences between the volume of
money paid out in connection with the work of foreigners in the Czech Republic on
one hand and the volume of money as income of the CR resulting from the work of
the Czech residents abroad, on the other hand. As it is clear from graph 2.2.5 this
difference rapidly widened especially since 2004 which can be attributed to
attractiveness of the CR upon joining the EU. If in 2004 labour costs of foreigners in
the CR made CZK 36.6 billion, in 2007 they increased up to CZK 75.9 billion.
Income from the Czech work in abroad increased only modestly (CZK 23.8 billion in
2007 compared to CZK 20.7 billion in 2004).
 Covering the
current account
deficit by the
financial account
surplus was
sufficient in 2007
The other attribute of external imbalance – covering of the current account deficit by
the financial account surplus (graph 2.2.3) - showed relatively favourable position in
2007 (CZK 15.5 billion). This surplus was higher compared with the current account
deficit, representing however only an incomplete fourth of the average nominal
coverage for the years 2000-2007 (CZK 56.9 billion). Moreover, the excess is not so
convincing as in the period when the financial account surplus exceeded the current
account deficit by hundreds billion CZK (e.g. CZK 211 billion in 2002 or CZK
106 billion in 2005). As regards longer perspective, also in 1995, a double surplus of
current and financial accounts was above a hundred limit, however, in 1995
relatively big surplus on the financial account came from short-term capital in form of
portfolio and other investment before monetary crisis whose further development in
form of sudden large outflow was considered a serious risk.
In respect of wobbles caused by privatisations of state ownership interests in big
companies and consequent volumes of inflowing direct investment, comparison with
long-term averages is lacking sufficient analysis.
Graph 2.2.6
Surpluses of direct and portfolio
investment (in CZK billion)
Graph 2.2.7
300000
30%
250000
25%
200000
Growth rate of import and export
of goods (y-o-y in %, FOB prices)
20%
150000
15%
100000
10%
50000
5%
0
2000
2001
2002
2003
2004
2005
2006
2007
-50000
0%
-100000
-5%
2000
direct investment
portfolio investment
2002
2003
2004
exports
2005
2006
2007
imports
Source: CNB, CZSOČSÚ
Source: CNB
 Flexible
external trade with
high growth rate
2001
The external trade development (graph 2.2.7) shows flexibility of the Czech
economy. It is not only adaptable but shows also high dynamics which is remarkable
especially from the aspect of permanent very high increase of total turnover.
Declining diversification of the economy and increased specialization towards a few
industries pulling the export can be risky and especially when their external demand
falls.
The growth rates if import and export were in 2007 reached above-average values
in the period 2000-2007 – imports compared with 2006 increased by 13.2%, exports
even by 15.3%, while average increases in the period 2000-2007 reached also twodigits – 13.6% and 12.0%. Average figures were impacted by a wobble in 2002
when exports and imports dropped, y-o-y, due to a slow-down of the EU economies.
Table 2.2.1
Year
2000
2001
2002
2003
2004
2005
2006
2007
Analysis of contributions of individual components of the Czech balance of payment
current account and its deficit in 2000-2007
Current account
(surplus)+/- (in
CZK billion)
-104.877
-124.478
-136.378
-160.615
-147.456
-48.500
-100.815
-88.959
Trade balance
(in %)
+115
+94
+52
+43
+9
-122
-64
-132
Balance of
services
(in %)
Balance of income
(in %)
Current transfers
(in %)
-52
+51
-14
-47
+67
-14
-16
+85
-21
-8
+75
-10
-11
+106
-4
-75
+321
-23
-42
+200
+7
-62
+285
+9
Source: own calculations based on the CNB and CZSOP data
Note: Mark “+“ for percentage contributions means that the component in the given year adds to the current account
deficit, i.e. increases the deficit, mark “-“ means that the component in the given year deducts from the deficit (reduces
the deficit); in case of current account surplus the meaning shall be reverse.
Internal balance
 In 2007
Maastricht
convergence
criterion fulfilled
with reserve –
deficit 1.6% of
nominal GDP
The Czech public finance reached in 2007 the best result since 2000 – the public
budget deficit dropped to 1.58 % of GDP at current prices. Robust economic growth
which in 2006 failed to improve markedly the economic result of the government
sector, however, in 2007 stood behind the public finance deficit reduction. On the
income side of the state budget and local budgets an increase of tax income and
income from social insurance were recorded surplus was registered also in the
economic result of health insurance companies.
As regards individual components of the government sector the reduction of public
budget deficit whose surplus increased by CZK 23.3 billion, y-o-y (from the deficit of
CZK 13.1 billion in 2006 to the surplus of CZK 10.2 billion) was most contributed to
by economic results of municipalities. The second most important contribution came
fro the surplus increases, as already mentioned, reached by health insurance
companies (by CZK 5.6 billion).
 Public budgets
are most
deteriorated by the
state finance deficit
2.4% of GDP
Graph 2.2.8
2000
2001
According to adjusted data of the government deficit and debt notification in
indicators based on the ESA 95 methodology in 2006, the state finance made major
contribution to the recorded deficit (-2.6% of GDP against -2,7% of GDP for the
whole public sector) and the remaining institutional units of the government sector
contributed a little (in total, local governments and social security funds recorded a
deficit amounting to 0.1% of GDP). In 2007, however, this structure of public deficit
experienced marked changes when the state budget showed wider deficit compared
to these two groups for which a surplus was recorded. Economic results of central
government ended up with a deficit in the amount of 2.35% of the nominal GDP
which is the best results since 2000 but even this achievement cannot change the
fact that the negative contribution of state finance to the total amount of the public
budget deficits is also the most remarkable one in the period 2000-2007.
Government deficit and deficit of
the central government (in % GDP)
2002
2003
2004
2005
2006
Graf č. 2.2.9
2007
2
2000
Net borrowings (deficit) of
government sector (in CZK billion)
2001
2002
2003
2004
2005
2006
2007
10
-10
0
-30
-2
net borrowings (deficit) of central
government (in CZK billion)
-50
-70
-4
-90
-6
-110
-8
-130
EU 25 government sector deficit/GDP
government sector or the CR deficit/GDP
central governement of the CR deficit/GDP
Source: CZSO, Eurostat
-150
-170
Source: CZSO
 Improvement of
public finance in the
CR is in parallel with
the development in
EU 27…
Since 2002, with the worst deficit ever (-6,8% of GDP), the Czech public finance in
relation to the economic performance of the country has been on the trajectory of
relative improvement. A deviation from this trend was registered in 2005 when the
country was below the limit of (3% of GDP) as laid down for fiscal area by
Maastricht criterion of nominal convergence towards the European Economic and
Monetary Union. However, since 2005, the Czech Republic has been developing in
parallel with the EU 27 where since 2003 the total revival of public finance coming
from their deficit squeeze has also been recorded. Last, it was in 2002 when the
European public finance (EU 25) showed a surplus.
 …
sustainability is not
definite
Despite good results reached in 2007 sustainability of public finance in the shortterm run is uncertain. The Czech Republic as well as any other country is in the
procedure of excessive deficit and is bound by the fulfilment of the Convergence
Programme (convergence program for 2007 counted with a 3.4% deficit of GDP).
The risk for the Czech public finance presents more marked drop of economic
growth and possible need to draw significantly from accumulated reserve funds
whose amount by the end of 2007 made 2.8% of GDP (by the end of 2006 it made
2.1% of GDP). Other risk involving factors survive (population aging).
Graph 2.2.10
Consolidated gross debt of the
government sector of the CR
(in CZK billion, y-o-y change in %)
1200
Graph 2.2.11
50
45
1000
40
35
800
30
600
25
20
400
200
0
2001
2002
2003
2004
2005
2006
0
-1
-4
2007
2000
2001
2002
2003
2004
2005
2006
2007
-2
-3
-5
-6
interests in % of GDP
primary surplus in % of GDP
in CZK billion
y-o-y change in % (right axis)
Source: ČZSO
 Consolidated
gross debt of the
government sector
increased from 2000
by 151% in nominal
terms to exceed
CZK 1 billion …
1
10
0
2000
2
15
5
Paid interests of the government
debt and primary surplus
(in % of GDP)
Source: MF
Robust economic growth in the Czech Republic affects also the relative amount of
the government sector debt which thanks to the influence of growth began to
modestly narrow in proportion to the GDP since 2003. It is so even despite the fact
that in the last decade and especially after 2000 – a rapid growth of nominal
consolidated gross debt of the government sector was recorded. The debt increased
form CZK 405.4 billion in 2000 to CZK 1.019 billion in 2007, i.e. by 151%. In 1998,
the debt amounted to CZK 299.8 billion which was only 15% of GDP. In 2001, the
government debt rose by a half (+46%) to reach almost CZK 600 billion thanks to an
enormous public finance deficit in connection with the government guarantees.
Since 2003, the y-o-y dynamics of debt fell, however, nominal increases in respect
of the consolidated gross debt of the government sector of the CR are still high.
A marked nominal growth of debt saturated by state bond and treasury bill issue
presents a risk. Despite low interest rates it is a burden for the state finance as
obvious from graph 2.2.11. The volume of paid up interest represents over 1% of
nominal GDP.
 … in relation to
GDP it has been
reduced below 30%
of GDP since 2004
Fast increase of the government sector debt is in relative terms – like in case of the
public finance deficit – corrected by the economic growth rate. It was just the big
nominal GDP which made to squeeze the debt of the government sector below 30%
limit above which the debt climbed in 2003 and 2004. Very moderate drop of this
relative indebtedness is obvious from 2005 on. In 2007, the government debt made
28.7% of the nominal GDP, in 2006 29.4% which compared with Hungary (65.6%),
Poland (47.6%) and Slovakia (30.4%) was the smallest indebtedness.
Graph 2.2.12
Comparison of consolidated gross debt of the Czech government sector and select
countries and groups within the EU (in % GDP)
2007
CR
EU 15
Italy
Ireland
2006
2005
2004
2003
2002
2001
2000
0
20
40
60
80
100
120
Source: Eurostat
 Internal
indebtedness is,
according to the
situation in the
government sector
in the CR the lowest
in the EU
The Czech Republic still shows one of the lowest relative levels of indebtedness of
the government sector in the European Union also in relation to the GDP – which
was in 2006 61.4% for the whole EU and 68.6% for the Eurozone. Maastricht
Convergence Criterion sets forth its limit in the amount of 60% of GDP. Comparable
with the CR in terms of calculated ratio is in this respect Denmark which, however,
shows its rapid drop from 51.5% of GDP in 2000 to 30.3% in 2006, as well as
Ireland (from 48.4% in 1999 to 25.1% in 2006). Notable reduction was recorded also
in Spain (from 59.3% in 2000 to 39.7% in 2006).
Development of the public budget deficit including namely the stage budget deficit
presents a risky issue for the level of internal debt of the CR since the area of the
out-of-budget funds affects, to a significantly lesser extent, the amount of budget
deficits due to the extinction of the Czech Consolidation Agency with transformation
debts.
2.3.
Labour market
Decreasing unemployment and its structure
Unemployment has been falling notably since 2007. The drop continues incessantly
 The lowest
unemployment from from 2005, a downward trend was recorded – save for 2003 and 2004 - from 2000
when the unemployment reached its long-term maximum.
1997
An absolute decrease of unemployment showed itself in relative figures, changes in
unemployment rate developed similarly and in 2007 the unemployment rate was
5.3%, on average. Compared with 23006 the unemployment decreased by 1.8 p.p.
which greatly exceeded the average of seven consecutive years. Q-o-q, the fall of
seasonally adjusted rate slowed down in 2007.
Unemployment (in thousand
persons)
Graph 2.3.2
500
10,0
450
9,0
400
8,0
350
7,0
300
6,0
250
5,0
%
thous. persons
Graph 2.3.1
200
Unemployment rate (in %)
4,0
150
3,0
unemployment
long-term unemployed
100
long-term unemployment rate
2,0
50
unemployment rate
1,0
0
0,0
2000
2001
2002
2003
2004
2005
2006
2007
Source: ČZSO (LFSS)
2000
2001
2002
2003
2004
2005
2006
2007
Source: CZSO (LFSS)
 Falling share of Development of unemployment was favourable and in international comparison, the
unemployment rate was lower than the EU 27 and the Eurozone average. This trend
long-term
was accompanied by positive structural changes i.e. regional differences in the
unemployment
unemployment narrowed and the growing number of jobs available reduced even the
long-term unemployment.
Since 2000, numbers of the long-term unemployed remained on relatively high level
exceeding the EU 15 average even thought lower than that in Poland and Slovakia.
In 2007, the numbers fell markedly and in Q4 for the first time the rate of long-term
unemployment was less than a half of total (falling) unemployment (48.6%).
Growing employment and its structure
 The highest
employment since
1996
Employment in 2007 increased, y-o-y, by 1.9%, most in the last three years of
continuous growth. The average employment in 2007 reached 4,922 persons. Similar
development experienced the employment rate to exceed the EU 15 average in the
long-term run.
International comparison should, however, consider also the working time duration
which in the CR was also higher compared with other European countries. This fact
was widely affected by big contribution of entrepreneurs to the total employment
because they reported higher number of hours spent at work and also by very low
share of part time jobs both for men and women.
 Change in the
structure of
economically active
persons
Changes in the employment rate were affected by changes in the unemployment rate
(effect of demand) and in the economic activity rate (effect of supply) which compares
the number of work force i.e. persons of fifteen and over fifteen who meet conditions
to be included into the employed or unemployed, to the number of population over
fifteen. While the total rate of economic activity recorded a moderate drop in the longterm view, in the group of persons – age group 15-24 it dropped more notably due to
the increasing number of students. In contrast, in the age group of people over 55,
the rate of economic activity raised due to the expanding retirable age limit. The rate
of economic activity of persons over 55 goes up sharply in the EU 15. A little different
development showed this rate in case of women – in the CR from 2000 the rate was
modestly falling and from 2004 it rather stagnated which was, among other things,
due to the number of temporarily economically inactive women taking care of family
and household.
An important indicator of employment is also the number of part timers whose
contribution to the total employment after 2000 rather stagnated. In international
comparison the share of women-part-timers was extremely low in the CR and made
approximately a fifth of the EU15 level. No doubt that part-time jobs represent a
solution how to better harmonize concerns of some women (mainly those taking care
of children) and employers.
The year 2007 showed the trend of long-term changes.
Economic activity rate (in %)
Graph 2.3.4
80
40
70
35
60
30
50
25
40
15 - 19 years
20 - 24 years
55 - 59 years
60 - 64 years
%
%
Graph 2.3.3
20
30
15
20
10
10
5
Share of part-timers (in %)
men in EU 15
men in the CR
women in EU 15
women in the CR
0
0
2000
2001
2002
2003
2004
2005
2006
2007
2000
Source: ČZSO
 Persistence of
structural
characteristic of
employment
2001
2002
2003
2004
2005
2006
2007
Source: Eurostat
The year 2007 did not change long-term trends in the employment structure including
the increasing share of employees with higher education and relatively high share of
employment in secondary sector especially in manufacturing, i.e. relatively low share
of tertiary sector which does not correspond with the economic level in the Czech
Republic.
Causes for favourable development in the labour market
 Contradicting
changes on the
demand and supply
side
The year 2007, in the labour market showed itself by a few favourable impacts acting
simultaneously or a few years in a row. An increasing demand for goods and services
caused that the employment grew. Its growth naturally did not complied with the GDP
growth since the productivity of labour grew simultaneously. Yet the year 2007 was
exceptional because the contribution of employment to the GDP growth was the
biggest from the birth of the Czech Republic.
On the supply side demographic impacts slowed down its growth. From 2000 the
upcoming population age groups (20-24) were falling in number while the “leaving“
age groups (60-64) were gradually becoming stronger. The year 2007 was again
exceptional in this respect since for the first time both trends were balanced and the
growth of the above defined supply stopped. However, demographic development
was modified – as mentioned above – by contradicting social effects: slow-down of
potential supply was strengthened by the growing numbers of students and
temporarily economically non-active women. The supply was, in contrast, increased
by numbers of working persons over 55 and working foreigners. Just the concurrently
acting phenomena resulted in the growth of employments and drop of unemployment.
Graph 2.3.5
Supply in the labour market (demographic changes in thousands persons)
900
800
thous. persons
700
600
500
400
300
upcoming population years
leaving population years
200
100
0
2000
2001
2002
2003
2004
2005
2006
2007
Source: CZSO
 Structural
imbalance in the
labour market
However, it should be noted that the market showed also a structural imbalance.
Since 2004 the growing number of foreigners took jobs which professionally or in
terms of wage did not satisfy domestic supply and the employment grew. The
unemployed, on the other hand, did not use all jobs available in respect of structure
which did not correspond with qualification of the unemployed (demand) and the
unemployment did not decline in proportion to the number of jobs and, consequently,
the number of jobs available increased.
The year 2007 confirmed the trend of changes which occurred in 2005 for the first
time. Falling unemployment was accompanied by accelerating number of employed
foreigners and alto the number of jobs available increased sharply.
Graph 2.3.6
Foreigners (shares of foreigners
in %)
Graph 2.3.7
7
Jobs available (in thousand)
160,0
share in labour force
6
140,0
share in the population
120,0
5
100,0
%
thousand
4
3
80,0
60,0
2
40,0
1
20,0
0,0
0
2000
2001
2002
2003
2004
2005
2006
2007
Source: ČZSO, Ministry of Labour and Social Affairs,
Ministry of Interior
2000
2001
2002
2003
2004
2005
2006
2007
Source: Ministry of Labour and Social Affairs
Labour productivity and wages
 Mitigation of
the advance of
wage growth to
labour productivity
The GDP growth accompanied by the labour productivity growth created conditions
for the average nominal wage increase. From 2007 (2007 incl. save for Q4) inflation
was relatively low and therefore wages grew also in real terms. The year-on-year
changes in its growth were falling behind the changes in labour productivity growth,
nevertheless, from 2001, as cumulated, they advanced the labour productivity
growth; the gap was widening until 2003 and then it narrowed slightly.
In 2007, wage increased by 4.4% in real terms and the y-o-y acceleration took place
(in Q4 it grew only by 1.9%); while labour productivity by 4.6%.
Graph 2.3.8
Wages and labour productivity
(y-o-y change in %)
Graph 2.3.9
7
35
6
total labour productivity
30
25
4
20
average real wage
%
%
5
3
15
2
10
total labour productivity
1
5
average real wage
0
0
2000
2001
2002
2003
2004
2005
2006
2007
Source: ČZSO
2.4.
Wages and labour productivity
(change compared with 2000 in %)
2000
2001
2002
2003
2004
2005
2006
2007
Source: ČZSO
Price development
GDP deflator
 Bigger growth
of implicit deflator
of production
compared to
intermediate goods
Total price level of domestic production in 2007 increased, y-o-y, by 2.3% i.e. the
growth was by 0.4 p.p. slower than a year ago. In respect of the weight of an industry
industrial producer prices which increased by 1.7% of which prices of energy by 7.3%,
affected markedly the price growth. Sharp increase was recorded also in prices of
market services (by 2.5%) with relatively important weight in total production. Bigger
changes occurred in the total price level development in respect of intermediate
goods consumption which in 2007 rose, y-o-y, by 1.4%, i.e. by 1.8 p.p. less than in the
previous year. A slowdown of the price increase of intermediate goods reflected an
accelerating drop of prices of imported products designed for domestic consumption.
The price level of imported products for intermediate consumption was higher than
prices of domestic production of intermediate goods, however, import prices were
falling. The implicit deflator of intermediate goods was also markedly affected by the
price of products and services consumed in industry which increased by 1.0% of
which prices of energy by 4.3%. An above-average growth was recorded for prices of
intermediate goods in agriculture (+3.7%) and in construction (+2.3%). Slower growth
of prices of consumed intermediated goods compared to domestic products is a
certain measure of success on non-financial enterprises in the domestic market which
financially benefited from price parity changes when implementing their production. An
integral result of the above development was a significant growth of aggregate price
level of GDP whose y-o-y increase by 3.7% in 2007 was significantly faster (by 2.0%)
than a year ago. The biggest increase was recorded for an implicit deflator of GVA in
agriculture (by 35.7%), in companies manufacturing and supplying electricity
(by 25.1%) and in construct (by 9.0%).
 Increase of
gross price level of
GVA contributed by
more than a third to
their increase in
value
Implicit deflators of the above characteristic features of production in 2007 exceed the
annual average growth rates reached in the last seven years while the impact of price
level changes on the change in value varies notably. Until 2007, compared with the
year 2000, the aggregate price level of domestic production increased by 12.1% (on
yearly average by 1.2%) and GVA by 18.4 % (by 2.4% on yearly average). Over
seven years the value of intermediate goods was impacted by price change by a little
more than a tenth, for domestic products the impact of price changes was almost one
fifth and in case of GVA it reached one third.
Graph 2.4.1
Implicit deflators
(change compared with 2000 in %)
Graph 2.4.2
20,0
Implicit deflators
(y-o-y change in %)
6
16,0
4
12,0
%
8,0
2
4,0
0
0,0
2001
-4,0
2000
2001
2002
production
2003
2004
intermediate goods
2005
2006
GVA
2007
GDP
Source: ČZSO
2002
2003
2004
2005
2006
2007
-2
GDP
production
intermediate goods
GVA
Source: ČZSO
 Different
impact of domestic
and foreign prices
on GDP implicit
deflator
Price changes in taxes on products and subsidies for products impacted the total price
development of the GDP more notably than in 2006. The implicit deflator of GDP in
the amount of 103.4% was in 2007 by 1.7p.p. higher than a year ago when the net tax
deflator had an entirely neutral impact on its level. In 2007, the net tax deflator in the
amount of 100,8% resulted in lower growth of aggregate price level of GDP compared
to GVA by 0.3 p.p. The GPP implicit deflator is affected not only by prices of
production (output), intermediate goods (input) and net taxes but also by deflators of
domestic realized demand and external demand and supply deflators i.e. terms of
trade development. Total price level of gross domestic final expenditures in 2007
increased by 2.5%, y-o-y, with implicit deflator of final consumption reaching 103.0%
and of gross capital formation 101.6% which was by 0.2 p.p. more or the same value
as in 2006. The year round deflator of final consumption was most affected by the
development in Q4 when the price level increased by 4.1% of which the level of
household consumer prices by 4.6%. The implicit deflator of total exports in the
amount of 100.2% was by 0.9 p. p up compared to the previous year and total imports
implicit deflator was 98.9%, i.e. by 1.3 p. p. lower than a year ago. The terms of trade
value 101.3% resulted in a significant appreciation of the Czech national work in the
external markets. From favourable relation between the development of export and
import prices benefited organizations dealing with foreign trade related activities.
Business profit in the amount of CZK 34.1 billion from external trade implemented in
2007 increased by CZK 55.6 billion, y-o-y.
 Thanks to
terms of trade the
GDP implicit
deflators increased
markedly
Implicit deflators of gross national final expenditures and of exports and imports in
2007 varied markedly from the average annual rates recorded in the last seven years.
In 2007, in comparison with the year 2000, the price level of GDP was 19.2% up (on
average by 2.5% per year), of gross national final expenditures by 14.7% (on yearly
average by 2.0%) and of final expediters by 19.6% (on average per year by 2.6%).
and gross capital formation by only 3.3% (on average per year by 0.5%). The drop of
export prices by 5.9% and import prices by 11.4% resulted into the terms of trade
improvement by 6.2%.
Table 2.4.1
Implicit deflators of GDP, domestic final expenditures, import and export
in %
GDP
Gross national final
expenditures
Final consumption
Gross capital formation
Exports
Imports
Terms of trade
2001
104.8
103.1
2002
102.8
100.5
103.9
100.9
99.6
97.3
102.4
101.9
96.9
94.5
91.6
103.2
Previous year = 100
2003
2004
2005
101.0
104.5
99.8
100.6
103.5
101.2
100.5
100.9
100.1
99.5
100.6
104.4
101.4
102.7
101.4
101.3
101.7
100.0
97.6
99.5
98.1
2006
101.7
102.5
2007
103.4
102.5
102.8
101.6
99.3
100.2
99.1
103.0
101.6
100.2
98.9
101.3
2007
2000
119.2
114.7
119.6
103.3
94.1
88.6
106.2
 Significant
influence of price
growth on the final
consumption
increase in value
A seven year increase of the GDP value was by more than a third (34.6%) contributed
to by total price level growth. The increase in value of gross domestic final
expenditures was contributed to by the price level increase by 32.0% of which final
consumption 43.0% and gross capital formation by only 6.9%. Favourable
development of terms of trade made a strong positive effect on the GDP increase in
value when the negative impact on the import increase in value was 2.2times higher
compared to the export increase in value. The increase of the export and import value
and external trade surplus owed exclusively to their growth of physical volume.
 Different price
level development
of domestic and
foreign prices
The development of internal market price level, i.e. domestic prices and external trade
prices, i.e. prices of international trade in goods and services expressed in CZK
which are affected also by the CZK exchange rate fluctuation varied significantly in
the last seven years. As a consequence, there was an entirely different influence of
production price movement as well as of gross domestic final expenditures that the
impact of foreign price movement on value change of basic economic characteristics
on the supply and demand side. While domestic prices of all price ranges registered
on national accounts in flows of production, consumption and accumulation were
growing annually, external trade price were continuously falling except for one year.
More markedly were falling import prices compared to export prices which resulted
into favourable terms of trade. A different development of price level of internal and
external market along with the change of contribution of domestic supply and demand
and external supply and demand to total supply and demand (growing weight of the
external sector) had a significant impact on changes of price parities i.e. relations of
implicit deflators of individual components of sources formed and consumed.
Producer prices
 Growth on
producer prices in
all price ranges
Producer prices in 2007 increased in all price ranges. The biggest y-o-y growth was
recorded in agricultural producer prices. Price increases of industrial and construction
producers were bigger than a year ago. The slow-down of growth reflected only in
market service prices.
 Prices
increased more
than in previous
years save for
market services
Comparison of the y-o-y price increase in 2007 and the average price change in the
period 2001 – 2006 is interesting. Agricultural producer prices in the previous 6 years
were falling on average and in 2006 they were by more than 5% lower than in 2000. In
2007 they were by 10.8 % up. The agricultural producer price increase in 2007 was,
compared with the average of the previous 6 years, more than double and was
contributed to especially by a dynamic oil price growth at the end of 2007 which was
only mitigated by CZK appreciation. The price increase in construction work compared
with the average reached in the period 2001 – 2006 was only moderate, developers
managed to reduce by a fourth the big price increase in materials and products used
in construction.
The only area where prices in the previous 6 years grew faster than in 2007 were
market services. This came mainly from a marked slow-down of price growth in 2007
in financial intermediation and even from the price decrease in insurance.
Graph 2.4.3
Producer prices
(change compared to 2000 in %)
Graph 2.4.4
25,0
20,0
20,0
15,0
15,0
Producer prices (y-o-y change in %)
10,0
%
%
10,0
5,0
5,0
0,0
0,0
-5,0
-5,0
-10,0
-10,0
2000
2001
2002
2003
2004
agricultural producers
construction work
2005
2006
2001
2007
2002
2003
2004
agricultural producers
construction work
industrial producers
market services in total
2005
2007
industrial producers
market services in total
Source: ČZSO
Source: CZSO
 Dynamic price
growth of crops
2006
Agricultural producer prices reached in 2007 the highest level since 2000 due mainly
to a price jump in 2007 which was caused especially by prices of crops. Price impulse
coming not only from strong demand for food in the world and especially in Asia but
also from poor harvest at the leading world exporters such as USA, EU, Australia and
Ukraine, took effect. Not intangible is also the consumption of agricultural crops in
production of bio-fuels which pushes the prices up. Prices of crops rose in 2007 by
almost a third of which prices of cereals by 49.0%, fruit by 22.1%, oleaginous plants
by 20.4% and potatoes by 19.7%.
Prices of animal products increased in 2007 only by 1.7% and remained lower than in
2000 which was the same situation in all years save for 2001. In 2007, the price
growth of eggs, poultry and milk was compensated by the price drop of pigs and cattle
for slaughter.
Graph 2.4.5
Agricultural producer prices
(change compared to 2000 in %)
25,0
Graph 2.4.6
Agricultural producer prices (y-o-y
change in %)
35,0
20,0
25,0
15,0
15,0
10,0
5,0
5,0
0,0
-5,0
-5,0
-15,0
-10,0
-15,0
-25,0
2000
2001
2002
2003
agricultural producers
2004
2005
2006
animal output
2007
crops
Source: CZSO
 Price increase
of industrial
producer prices
continued
2001
2002
2003
agricultural producers
2004
2005
2006
animal output
2007
crops
Source: CZSO
Industrial producer price growth was the fastest in 2007 compared with the last three
years. Of the whole seven year period prices grew faster only in 2001 and 2004. The
price growth speed-up was contributed to especially the year-end when the oil import
price growth was resumed and the food prices reflected the price increase of
agricultural and food products in the world markets.
In 2007, most grew prices in electricity, gas and water supply (prices of electricity incl.
distribution by 9.2%) and of basic metals and pre-fabricated products (e.g. prices of
iron, steel and ferroalloys by 9.2% and prices of cast iron tubes and tubes by 13.3%).
Identically by 4.4% grew prices of food and prices in coke and refined petroleum
products. In Q4, the price increase in these areas was 9.3% and 21.1%. Only prices of
transport equipment went down.
Graph 2.4.7
8,0
7,0
6,0
5,0
4,0
3,0
2,0
1,0
0,0
-1,0
-2,0
Industrial producer prices in individual industries (change compared to 2006 in %)
TOTAL
6,9
4,9
4,4
3,5
4,4
3,0
2,8
0,5
7,4
6,7
5,4
2,9
0,4
2,7
1,5
0,2
-1,1
C
D
DA
DB
DC
DD
DE
DF
DG
DH
DI
DJ
DK
DL
DM
DN
E
Group
Source: CZSO
 Small growth
of market service
prices
Market service prices in 2007 rose by only 1.6%. Among areas for which these
prices are observed lower were prices in insurance (drop of motor vehicle insurance
prices) and telecommunications (price drop of data services and services of data
transmission). Price growth in financial intermediation was intangible. Above average
increases were recorded for prices of business services and real estate services
(price increase in advertising services and computer technology services), further
prices in the road freight transport. Sewerage collection charges grew by
approximately 5%, i.e. standard high rate.
Over the last seven years sewerage collection charges grew most, by almost a half.
In financial intermediation prices grew by 28.6% when almost a half of the increase
occurred in 2001. Prices of business services grew over 7 years by a fifth. The only
domain where prices over the whole period remained below the level of 2000 were
prices in post and telecommunications while most significant price drop was
recorded in 2005 due to the price reduction of mobile telephone services and
services related to fixed telephone lines.
Graph 2.4.8
Market service prices
(change compared to 2000 in %)
Graph 2.4.9
Market service prices
(y-o-y change in %)
50,0
12,0
40,0
8,0
30,0
% 4,0
% 20,0
0,0
10,0
-4,0
0,0
-10,0
-8,0
2000
2001
2002
2003
2004
2005
2006
2007
freight transport and storage
post and telecommunications
financial intermediation
insurance
business services
sewerage collection
Source: ČZSO
2001
2002
2003
2004
2005
2006
2007
freight transport and storage
post and telecommunications
financial intermediation
insurance
business services
sewerage collection
Source: CZSO
Consumer prices
 Bigger growth
of consumer prices
Consumer prices in 2007 rose by 2.8% i.e. by 0.3 p.p. more than in the previous
year. The increase was contributed to by prices of food an non-alcoholic beverages,
alcoholic beverages and tobacco, and housing, electricity, heat and water supply, all
identically by 0.8 p.p. The impact of price level in other divisions was intangible. Over
the year the inflation rate decreased and its sharp increase was recorded as late as
in the last quarter due to dynamic growth of prices of food and fuel.
The growing inflation came from the big increase in food and energy prices in the
external markets and from the growth of unit wage costs and consumer demand.
Important was also the impact of administrative changes which pushed the excise
tax for tobacco up over the year, regulated rentals, fee for some educational
services, electricity prices, the television concession fee, prices of social care and
prices of transport by railway.
 Considerable
speed-up of
consumer price
growth in Q1 2008
Consumer prices in Q1 2008 increased, y-o-y, by 7.4% and the growth was by 4.7%
faster than a year ago. A one third contribution came from price sharp upward trend
in housing, electricity gas and water supply and fuels and more than a fourth came
from the price of food and non-alcoholic beverages. Prices of alcoholic beverages
and tobacco recorded a marked increase (contribution of 1.3 p.p.) and by 0.6 p.p.
contributed prices in health which recorded an extremely above-average growth.
 Increase of
pension
differentiation
The consumer price level increase affected painfully families with children and
minimum income where prices increased by and households of pensioner with the
price increase by 9.3% which represented the y-o-y acceleration of growth by
6.6 p.p. and by 6.8 p.p. Differentiation of pensions broken by social groups continued
to widen.
Purchase power of consumer households in Q1 2008 markedly dropped by 6.9%, yo-y, due to which gross disposable income of household was lower in real terms than
in nominal terms by approximately CZK 32.0 billion. Households thus paid for the
consumption of the same physical volume of goods and services in Q1 2008 by CZK
28.6 billion more than a year ago.
 Over 50% of
price increase
compared to 2000
came from prices of
housing, electricity,
gas and water
supply
Table 2.4.2
Consumer price growth in 2007 was by 0.3 p.p. bigger that the average growth in the
previous six years. In 2007, consumer prices were by 17.9% higher than in 2000.
Over a half of the price increase came from the growth of prices for housing, water
supply, energy and fuels. Contribution of 1.5 p.p. to the growth came from prices of
alcoholic beverages and tobacco, food and non-alcoholic beverages, post and
telecommunications and hotels and restaurants. In the observed period prices in
wearing apparel and footwear and furnishings, household equipment and routine
maintenance went down.
Consumer price indices (previous year = 100)
TOTAL
incl.:
food and non-alcoholic beverages
alcoholic beverages and tobacco
housing, water supply, energy and fuels
transport
post and telecommunications
recreation and culture
2001
104.7
2002
101.8
2003
100.1
2004
102.8
2005
101.9
2006
102.5
2007
102.8
105.1
103.2
109.9
100.3
105.0
105.1
98.1
101.9
106.1
98.1
103.3
102.0
97.8
100.9
102.0
100.1
98.0
99.7
103.4
102.9
103.5
102.2
112.9
101.0
99.7
101.4
104.1
101.4
107.6
101.8
100.8
101.2
106.3
101.6
106.8
101.4
104.7
110.2
103.4
100.4
100.0
100.0
Source: CZSO
 Faster growth
of costs of living in
households of
pensioners
Like every year also in 2007 costs of living in households of pensioners grew faster
than in households of employees. This traditional phenomenon is caused by a
different internal structure of consumption in households of pensioners, including
mainly goods and services with faster price increase. Costs of living of employees
increased by 2.8% and those of pensioners by 3.7%.
The same development was recorded in each of the last sever years. For the whole
period the costs of living in households of pensioners grew almost by a half faster
compared to households of employees. In 2007 costs of living in households of
pensioners were by 24.0% higher than in 2000 and in households of employees a
16.4% growth was recorded.
Graph 2.4.10
Consumer prices
(change compared to 2000 in %)
Graph 2.4.11
25,0
Consumer prices
(y-o-y change in %)
7,0
total
employees
pensioners
20,0
total
6,0
employees
pensioners
5,0
15,0
4,0
3,0
10,0
2,0
5,0
1,0
0,0
0,0
2000
2001
2002
2003
2004
2005
2006
2007
2001
2002
2003
2004
2005
2006
Source: ČZSO
2007
Source: ČZSO
 Criterion of
price stability in
2007 was not
fulfilled
In 2007, Harmonised Consumer Price Index providing for international comparability
reached in the CR 3.0%. Inflation was identically by 0.9 p.p. higher than in the
previous year and also compared with the EU 27. The inflation was also higher than
set forth by price stability criterion7. The criterion is calculated as an average of three
countries reaching in 2007 the lowest inflation, i.e. Malta, the Netherlands and
France, increased by 1.5 p.p. made 2.8%. In the previous two years this criterion
was fulfilled by the Czech Republic.
 Since 2000 the
price growth was
the same in the CR
and EU 27
The price level in the Czech Republic in the last sever years fluctuated more than
the average price level in all 27 state of the European Union. What is remarkable is
the fact that the average annual price was in this period in the CR and EU 27 almost
identical (2.16% and 2.14%). Ability to mitigate inflation trend was in the Czech
economy supported decisively by CZK appreciation. Approximation g of the price
level in the CR and the Eurozone was to a considerable extent due to appreciation
of CZK to EUR. CZK appreciated in 2007 compared with 2000 by 28.3%, i.e. by
3.6% per year.
Graph 2.4.12
Harmonized Consumer Price Index (change compared to the previous year)
5,0
EU 27
4,0
CR
Maastricht criterion
3,0
2,0
1,0
0,0
-1,0
2001
2002
2003
2004
2005
2006
2007
Source: Eurostat
7
The country shall maintain in long term perspective price stability and the average rate of inflation measured in the
course of one year preceding the survey which does not exceed by more than 1.5 p. p. the inflation rate of three member
countries reporting the best results.
External trade prices
 Positive terms
of trade value
Over the year gradually falling terms of trade reached on average positive value of
102.3% which was a turn-round compared to 2006. An opposite development
compared to 2006 was reported for import and export prices. Export prices increased
by 1.3%, y-o-y (in 2006 drop by 1.2%), import prices decreased by 1.0% (in 2006
growth by 0.3%). Among more important groups positive terms of trade were reported
for food, machinery and transport equipment and consumer goods.
A significant downward
inedible, except fuels
development of these
respond to these prices
did in Q4 2007.
effect on terms of trade came in 2007 from crude materials,
and related chemicals. This was linked with the price
commodities in the world markets. Import prices sensibly
wobbles and as prices grow rapidly terms of trade fall as they
 Positive effect
of exchange rates
on terms of trade
value
Changes of external trade prices include the exchange rate changes of the Czech
koruna to observed tradable currencies. As the Czech koruna appreciated to EUR
and USD in 2007 exchange rates had a downward effect on export and import prices.
Since the appreciation of the Czech koruna exchange rate to USD was higher than to
EUR, the impact on import price decrease was stronger than on export prices and
impacts of exchange rates increased, according to experimental calculations, terms
of trade by more than one percentage point. In 2006, it was by incomplete 0.5 point.
 Import and
export prices
recorded a longterm fall
Terms of trade in 2007 reached the highest values for the last seven years. Negative
values of terms of trade were recorded only in the period 2005 and 2006. Import
prices in 2001 to 2007 increased only twice and mitigated the price growth in the
economy. The biggest drop was recorded in 2002 when prices of mineral fuels
dropped by almost a fifth. The price drop in this year was supported also by a strong
appreciation of koruna in the observed period. In 2007 compared with 2000 export
prices were lower by 3.23%, import price by almost 10% which owed to a significant
price drop in 2002.
Graph 2.4.13
Export and import prices, terms of Graph 2.4.14
trade (change compared to 2000 in
%)
Export and import prices, terms
of trade (y-o-y change in %)
4,0
8,0
6,0
2,0
4,0
0,0
2,0
0,0
-2,0
-2,0
-4,0
-4,0
-6,0
-6,0
-8,0
-8,0
-10,0
-10,0
2000
2001
export prices
2002
2003
2004
import prices
2005
2006
2007
terms of trade
Source: CZSO
2001
2002
export prices
2003
2004
import prices
2005
2006
2007
terms of trade
Source: CZSO