Czechia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Central geographic location at the heart of industrial Europe
- Tightly integrated in the international production chain, and more particularly the German one
- Preferred destination for FDI in Central Europe
- Significant industrial potential
- Robust public accounts and banking system
- Small, open economy: exports account for 80% of GDP
- Dependent on European demand: 64% of exports are to the Eurozone, one third to Germany
- High foreign intermediate inputs in exports and low contribution of services to locally value-added in exports
- Automotive sector occupies a large share of the economy
- Lack of rapid transport links with the rest of Europe
- Aging population and shortage of skilled labor
Recovery could be limited by a deteriorated labor market
The Czech economy has entered 2021 while being affected by the second wave of the COVID-19 pandemic, which is stronger than the first wave. Indeed, the total number of Czechs diagnosed with coronavirus exceeded half of a million at the beginning of December 2020, which represents around 5% of the population, and over 8,500 people died from the disease. The new daily cases per 1 million inhabitants peaked at the beginning of October 2020, with the highest level in the European Union. Despite the easing of lockdown measures, domestic demand, still affected by the pandemic, is expected to remain sluggish in early 2021, with an increased propensity to save. Household consumption will recover later on, but the scale of the improvement will be subject to developments in the labor market. The unemployment rate increased to 2.9% in October 2020, from 2.0% a year before, but remained the lowest in the European Union. Once the stimulus measures phase-out, the labor market is likely to worsen due to higher unemployment and sluggish wage growth. Investments will recover this year, after the slump in 2020 because of high uncertainty, lockdowns, and supply chain disruptions. The rebound in investments will be driven mostly by the public sector, while companies are likely to use their spare capacities at first and will then decide to conduct investments if the recovery of demand justifies it. The manufacturing sector will still be driven by the automotive industry and the activity in the German economy. Both factors remain crucial for Czechia, as exports to Germany reach nearly one-third of the total. The automotive sector generates over 9% of total gross value added and accounts for over 8% of total employment and above 26% of exports.
After series of interest rate hikes in 2017-2019, the pandemic forced the central bank to cut interest rates in 2020. It made the cost of lending more attractive, but also resulted in a depreciated currency that supports Czech external competitiveness.
Fiscal position still in deficit
The budget balance will improve in 2021. However, it is not expected to come back to a surplus, which had been recorded before the pandemic. Government support measures have led to deteriorated public finance figures and their possible extension could affect the outcome of the budget balance. The general government debt is likely to cross the 40% of GDP level, but it will remain one of the lowest in the European Union.
The current account deficit increased because of slumping exports. The Czech economy is highly open with various companies participating in global value chains. Moreover, challenges in the automotive sector and a drop in demand for cars hit the Czech economy due to its strong dependence on this sector. By contrast, these factors are likely to benefit Czech exports this year, with the revival of global trade and improving perspectives for the automotive industry. Export dynamics will be closely linked to the performance of Germany as the main trading partner.
ANO remains in power
The ANO 2011 (center-right) movement led by Andrej Babis won the October 2017 elections by a large margin, obtaining 30% of the votes cast and 78 out 200 seats in parliament. The recent cabinet consists of the coalition between ANO and the Social Democratic Party (CSSD). In the latest Senate elections held in October 2020, opposition parties succeeded to get control of the chamber. Although the upper house is not powerful, elections showed that Czechs are not satisfied with the management of the health crisis and unpopular restrictive measures. However, the turnout in the second-round ballot was low (below 17%) and general elections scheduled for October 2021 could result in prolonged support for ANO, especially if Czechia goes well through the pandemic.