E&Y raises Czech 2014 GDP growth estimate to 2.2% on forex interventions.

By bne IntelliNews February 28, 2014

The Czech economy should recover in 2014 posting a growth of 2.2%, consultancy Ernst & Young said in a new forecast improving its previous estimate of 1.9% mainly due to the central bank’s foreign exchange interventions aimed at keeping the koruna weak.

E&Y believes that rising exports will also stimulate domestic demand as firms expand capacity and increase their demand for labor. This will help the economy to expand by around 3% from 2015 to 2017, according to E&Y’s latest Rapid-Growth Markets Forecast published in February.

The weaker Czech currency will also prevent inflation from falling too far. The average inflation is projected at 1.7% in 2014 and at 1.9% in the next three years. This will lower real interest rates, encouraging companies and households to boost their investment and spending. According to E&Y, the Czech central bank will keep the koruna weak at least until early 2015.

The recovery in the euro zone, which buys some 63% of Czech exports, will support growth in the Czech Republic. According to an analysis of E&Y the country will benefit the most in CEE from the euro zone recovery thanks to its strong banking sector with the share of non-performing loans the lowest, along with Poland, and the loan-to-deposit ratio below 100% suggesting that the Czech Republic has a significant potential for expanding credit without requiring support from parent banks. Yet, E&Y cautioned that growth might be held back by possible tensions within the newly formed governing coalition.

E&Y estimates for the Czech Republic 2013 2014 2015 2016 2017
Real GDP growth (%) -1,4 2,2 2,9 3 2,9
CPI inflation (%) 1,4 1,7 1,9 1,9 1,9
Current account balance (% of GDP) -1,8 -1,8 -1,9 -2 -1,8
External debt (% of GDP) 51,/ 53,6 52,2 51,7 50,9
Govt balance (% of GDP) -2,9 2,9 -2,8 -2,6 -2,3
Source: E&Y          

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