Czech FinMin sharply raises 2014 GDP growth outlook to 2.7%, lowers deficit target to 1.5%

By bne IntelliNews July 29, 2014

The Czech finance ministry improved its GDP expectations for 2014 reflecting the stronger-than-expected economic activity in the first quarter of the year, the ministry said in a new forecast released on July 28. The ministry expects the GDP to rise by 2.7% this year, sharply improving its forecast from April when it was expecting a 1.7% rise.

For 2015 the ministry also raised its forecast to 2.5% from 2%. In both 2014 and 2015, all expenditure components should contribute positively to economic growth. Domestic demand should account for two thirds of economic growth and foreign trade balance for the remainder, the ministry said.

Despite the central bank’s interventions to weaken the koruna and bring inflation back to its 2% target, inflation should ease to 0.6% in 2014 from 1.4% in 2013. Unlike in previous years, administrative measures (especially a decrease in electricity prices) should have an anti-inflationary impact throughout 2014. In 2015, consumer price growth would quicken to 1.7%.

The improved economic growth outlook is reflected in better expectations for the developments on the labour market. The ministry now sees a faster decline in the unemployment rate than it forecast in April. Also, employment should grow at a stronger pace in 2014 than previously thought.

On fiscal policy, the ministry also raised its expectations saying it expects this year’s budget deficit to stay at 1.5% of GDP, lowering the estimate by 0.3pps from April thanks to improvement in tax incomes, mainly direct taxes and VAT, and lower expenditure on interest payments due to very stable debt development and relatively favourable financial markets conditions. 

The government sector debt as a percentage of GDP decreased slightly to 46% in 2013 and in 2014 the ministry expects it to fall further to 44%.

The ministry's new GDP growth forecast for 2014 is slightly more optimistic than the IMF's latest projection for a 2.5% economic growth. Both the European Commission and the World Bank see the Czech 2014 GDP growth at 2%.

  2013 2014 2015 2014 2015
    Current forecast Previous forecast
GDP growth in % -0,9 2,7 2,5 1,7 2,0
Household consumption growth in % 0,1 1,6 1,4 0,6 1,5
Govt consumption growth in % 1,6 1,9 1,6 0,8 0,7
Gross fixed capital formation growth in % -3,5 4,1 3,5 2,7 2,0
Contribution of foreign trade to GDP growth -0,3 0,6 0,5 0,5 0,6
Contribution of increase in stocks to GDP growth -0,2 0,0 0,2 0,2 0,1
Avg inflation in % 1,4 0,6 1,7 1 2,3
Employment (LFS) growth in % 1,0 0,5 0,2 0,2 0,2
Unemployment rate (LFS) avg in % 7,0 6,4 6,1 6,8 6,6
Wage bill (domestic concept) growth in %, -0,9 2,8 3,8 1,8 3,5
Current account % of GDP -1,4 0,4 0,0 -0,4 -0,3
Govt balance % of GDP -1,5 -1,5   -1,8  
Govt debt % of GDP 46,0 44,0   44,0  
Source: Czech finance ministry's July macroeconomic forecast

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