Economic conditions and policy challenges

By g - Jun 5, 2017 - No Comments

Membership of the European Union has marked the end of the Czech

Republic’s transition to a market economy. Institutions, policies and, in broad

terms, the role of the state in markets and the structure of economic activity now

differ little from many other OECD countries. Furthermore, an impressive record of

low inflation has been maintained. With such positive developments a strong pro-

cess of catch-up would normally be expected. Czech GDP per capita is consider-

ably below the more affluent OECD countries and under the right conditions the

economy should have a healthy margin of growth on high-GDP-per-capita coun-

tries. The reasonably strong growth of recent years is a welcome sign that catch-up

is underway, though a weak long-term record warns against complacency. There is

broad support in the current political climate to tackle the basic economic chal-

lenges, though pushing reforms through has to date often been hampered by

political complexities (Box 1.1).

Growth has picked up

Growth in recent years has been relatively strong, in 2003 it was 3.1 per

cent and virtually the same in terms of GDP per capita – population growth is cur-

rently close to zero.1

The pace of GDP increase is expected to be greater for this

year and to continue at least through to 2006, driven by an encouragingly strong

pick-up in investment and exports. The OECD’s autumn 2004 projection expects

growth of 3.9 per cent in 2004 and projects growth of 4.2 per cent and 4.1 per cent

in 2005 and 2006 respectively (Box 1.2). This is echoed in other projections, for

instance the Central Bank’s quarterly Inflation Report for July 2004 also projects

growth of close to 4 per cent for 2004 and 2005 (Czech National Bank, 2004). The

Ministry of Finance’s October 2004 projection expects annual growth of 3.8 per

cent for 2004 and 3.6 per cent in 2005, reflecting a tradition of conservative projec-

tions by the Ministry.

However, the long-run average rate of growth is more modest and there

is a risk that the encouraging recent performance will not be sustained. Average

annual growth in GDP per capita between 1995 and 2003 was under 2 per cent, a

little below that in the euro area and United States and close to 2 percentage

Czech Republic