Europe

Czech Republic
Last reviewed: 31 March 2009

Country information

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ECONOMY

Basic Economic Facts

GDP: CZK 3,530 BN (US$ 175 BN) (2007)
GDP per head: CZK 341,989 (US$ 16,955 ) (2007)
Annual Growth: 0.7% (2008, 4th quarter)
Inflation: 6.3 % (Average rate in 2008) / 5.4% (February 2009)
Major Industries: road vehicles, metallurgy, industrial and office machinery and equipment, electrical equipment
Major trading partners: Germany, Slovakia, Poland, Austria, France, United Kingdom, China
Exchange rate: £1 = approx. CZK 29.4 (March 2009)

The Czech Republic is one of the most stable and prosperous of the post-communist states. Economic growth has been driven, in particular, by high levels of foreign direct investment (FDI), domestic consumer spending, and Czech exports. Economic growth since EU accession has been strong, but the country has been badly affected, especially by the downturn in key export markets, and both Government and Central Bank are predicting negative economic growth in 2009. Industrial production fell by 23.3% and unemployment increased slightly in the fourth quarter of 2008, the first such increase since 2005. However, the unemployment rate of 4.4% remains one of the lowest in the EU.

Czech trade is mainly with the EU. Over 85 % of its exports are to EU countries and just under 70% of imports are from the EU, with an increasing amount from China. The Czech Republic has been extremely successful at attracting FDI, much of it in automotive and electronics. In 2007 the Czech Republic attracted 6.673bn Euros of FDI.

In January 2007, the coalition agreement establishing Prime Minister Topolanek’s government outlined a clear commitment to cutting the budget deficit from 4% of GDP then to 3% in 2008, 2.6% in 2009 and 2.3% in 2010 with expenditure and the size of the deficit closely tied to the rate of real-terms GDP growth. In January 2008 the government introduced a single 15% personal income tax rate based on calculated ‘super-gross’ income including employer’s 35% health and social insurance contribution. ‘Super gross’ rather than gross income forms the base for deductions for mortgage interest, pension funds and life insurance contributions (effectively leaving the tax payer worse off in these areas). The lower rate of VAT (applied to staple foods and other daily necessities) rose from 5% – 9% and excise tax on tobacco increased slightly. ‘Green taxes’ applied to coal and coke (around 10%), electricity (1%) and gas gave an average 3.3% rise in domestic energy costs. The government have called for new legislation to ensure any increases in mandatory spending (welfare, subsidies, pensions and healthcare) is capped at 50% of all spending by 2010.

The Czech Republic joined Schengen at the end of 2007, but entry into the Euro seems unlikely in the short term. Meanwhile the Czech crown continues on sustained period of appreciation. Following the recent global financial crisis, the Czech Republic banking sector seems to be in reasonably good shape, and has not to date required recapitalisationThe Finance Ministry has increased the amount guaranteed in bank accounts to 50,000 euro.