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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