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Where will the Czech economy be in ten years?
( 09 / August / 2005 )
The Economist intelligence Unit (EIU) projects that Czech Republic´s growth will reach an annual average rate of 3% in 2005-30. Following substantial rises in GDP in the 2005-09 period?when growth is forecast to average 4.3% annually owing to major foreign investments and improved labour productivity?annual real GDP growth is set to slow slightly to 2.7% in 2010-30.
By 2030 the Czech Republic's GDP per head in purchasing power parity (PPP) terms (at US$ 76,940) is therefore expected to be above the average in the EU15.
Initial conditions
The Czech Republic benefits from several strong advantages even amongst its neighbours in Central and Eastern Europe. Its location is very close to German firms, which allows for "just in time" manufacturing with German companies. The Czech Republic has one of the most skilled work forces in Central and Eastern Europe, with a long-established manufacturing tradition. Physical infrastructure is among the best in the region. Although the Czech Republic does not have the lowest taxes or wages in the region, it still remains a highly competitive business environment. The country is now the regional leader for the forecast period 2005 - 2009 in the Economist Intelligence Unit's business environment rankings. This should lead to high levels of growth over the 2005-09 period. The Czech political system, despite the apparent recent turmoil, is overall stable and should be even more so after the June 2006 parliamentary election. The financial system is secure, with 95% of the banking system in private hands. Entry to the EU has helped to push forward reform of the government bureaucracy, which needs substantial restructuring. Efforts to rein in fiscal spending, however, are likely to fail, which remains the largest macroeconomic concern, although debt levels are not yet excessive. Reform in education, healthcare, pension, administration, and other needed areas are likely to have to wait until the next government comes into power. Euro adoption could only occur in 2010 at the earliest, given the policy agendas of the major parties. Accession to the EU should entrench in the Czech Republic an economic system based on private ownership and competition, with free access to markets in Western Europe, irrespective of which political parties are in power. FDI should continue to keep private investment robust.
Demographic trends
The Czech Republic's population is expected to decline slightly in the 2005-20 period, with the working-age population declining markedly. There will be a dramatic fall in the birth rate as Czech families adopt more west European styles of living. The population above working age will continue to expand as diets improve and tobacco and alcohol consumption is reduced. Following a forecast decrease in the working-age population of 0.09% annually in 2005-09, the working-age population will fall by an average 0.88% per year in 2010-20, with the pace of decline decelerating to 0.67% in 2021-30 as immigration increases. The demographic change in the Czech Republic between 2010-20 and 2020-30 will represent a 1-percentage-point drag on growth.
The labour market is becoming more flexible. Improvements in the labour market and increased labour participation rates should counter some of the forecast adverse demographic trends, at least until 2020.
Period | 2005-09 | 2010-20 | 2021-30 | 2005-30 |
| Population and labour force (% change; annual av) | ||||
| Total population | -0.13 | -0.17 | -0.39 | -0.25 |
| Working-age population | -0.09 | -0.88 | -0.67 | -0.65 |
| Working-age minus total population | 0.04 | -0.70 | -0.29 | -0.40 |
| Labour force | -0.23 | -0.53 | -0.15 | -0.33 |
| Growth and productivity (% change; annual av) | ||||
| Growth of real GDP per head | 4.4 | 2.9 | 3.1 | 3.2 |
| Growth of real GDP | 4.3 | 2.7 | 2.7 | 3.0 |
| Labour productivity growth | 3.9 | 3.3 | 2.8 | 3.2 |
| Growth of capital stock | 6.2 | 2.4 | 4.6 | 3.9 |
| Total factor productivity growth | 1.9 | 2.2 | 1.2 | 1.7 |
External conditions
Services remains an area that requires further liberalisation among EU countries, which should boost Czech growth.
Institutions and policy trendsIn recent years the Czech Republic has seen reforms stagnate, although the country's business environment still remains among the best in Central and Eastern Europe. Reforms of healthcare, pensions, education, public administration and labour regulation have all been delayed. Over the next 20 years all institutions will approach full EU standards and income will be above the EU average. Greater resources should be placed in educational institutions and healthcare areas to promote a healthy, skilled workforce. There should be significant funding in private pension schemes. The business environment is likely to lead the region in attractiveness over the next few years, given its natural endowments, and its attractiveness should be sustained in the coming decades.