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The Czech economy is currently benefitting from favourable internal and external conditions. Strong household consumption is expected throughout the rest of 2017, and this is being supported by high employment and growing wages, as well as high levels of consumer confidence.

Macroeconomic policies in the Czech Republic are generally positive. In April, the central bank ended an exchange rate policy that prevented appreciation of the Koruna against the Euro.[1] The Ministry of Finance of the Czech Republic recently increased its forecast for real GDP growth in 2017 from 2.5% to 3.1%, and from 2.5% to 2.9% in 2018, and an increase in foreign trade is thought to have had some impact on this.[2] The automotive industry, in particular, has seen a spike in international demand. In fact, the Czech Automotive Industry Association reported year-on-year production growth of 5.1% in the first half of 2017.[3]

There has been an acceleration in year-on-year growth of consumer prices above the inflation target of the Czech National Bank at the start of 2016 and in 2017. Pro-inflationary effects of rising wages, positive output gap and anti-inflationary effects resulting from tightening of monetary conditions, especially in the exchange rate component, should offset each other. This will lead to a slight decrease in the forecast of the average inflation rate in 2017 from 2.4% to 2.2%, and from 1.7% to 1.6% in 2018 as predicted by The Ministry of Finance of the Czech Republic.[4]

The growth in the Czech economy has led to persistent increases in the demand for labour. Employment growth has been exceeding 1% since the end of 2014, leading to a depletion in unutilised resources. The unemployment rate reached 3% in May 2017, the lowest in the EU since the beginning of 2016.[5] The unemployment rate for 2017 and 2018 is also forecasting an improvement – from 3.4% to 3.2% and from 3.2% to 2.9%, respectively.[6]

The economic upswing in the Czech Republic has benefitted small and medium sized enterprises (SMEs) as business sentiment is set to remain positive for the next 12 months. An acute shortage of labour highlights the contrasting side to economic growth, especially for those SMEs that are neighbouring with established industrial zones, as it is almost impossible to acquire skilled labour.

EU countries remain the most common export destinations for 99% of exporting SMEs according to research by IPSOS and the Association of Small and Medium-Sized Enterprises and Crafts of the Czech Republic (AMSP).[7] Of those EU countries, Germany has grown steadily as an export territory for Czech SMEs and is the country’s largest export territory.

Regulation, bureaucracy and – due to strong export performance – exchange rate fluctuations are viewed as the primary risks. The fear of exchange rate fluctuations has tied in with the ending of the aforementioned exchange rate policy that prevented appreciation of the Koruna against the Euro, as Czech SMEs now view the Koruna as unstable. Despite these challenges, forecasts for the Czech Republic are strong, the economy is in a good place and SMEs are looking positively towards the future.

Michal Gabriel, Managing Director, Bibby Financial Services Czech Republic