Economist: despite record 2020 deficit, Czech outlook rosier than most in coming years

Illustrative photo: stevepb, Pixabay / CC0

Prior to the Covid-19 pandemic, the Czech economy was enjoying greater economic growth than most of its European Union peers, due to sound economic policies, openness to foreign direct investment and global value chains helped to lift productivity, employment, wages and living standards, as the OECD noted in a December country report. What is the outlook for 2021 and beyond?

The Czech Republic has for years also enjoyed among the lowest levels of government debt to GDP in the entire EU, alongside Estonia and Luxembourg. As such, the country was relatively well prepared for an economic crisis and could more readily afford perceptible increases in public spending than most.

For 2020, the budget deficit was 367.4 billion crowns, Finance Minister Alena Schillerová announced on Tuesday. Of that amount, 216.5 billion crowns went to fighting and trying to alleviate the ill effects of the coronavirus pandemic, including compensating businesses, employees and others.

But while the Czech Republic can afford to run a budget deficit better than most, the government’s spending during the crisis has been somewhat misdirected, Lukáš Kovanda, chief economist at Trinity Bank and a member of the National Economic Council, told Czech Radio.

Lukáš Kovanda | Photo: Khalil Baalbaki,  Czech Radio

“As often noted, it is absolutely the biggest deficit in the country’s history. We cannot be pleased with the situation, but the conditions did merit action. All advanced economies are in debt. So, this is nothing extraordinary but rather a debt restructuring.

“Still, I think it should have been done differently. For example, more money from state coffers went to the facemasks for pensioners than for compensating the self-employed. It simply drew more attention. And though pensioners have been severely affected by isolation, self-employed people suffered more.”

In its December report, before the approval of the Pfizer/BioNTech anti-coronavirus vaccine for use in the EU, the OECD projected Czech GDP dropping by 6.8 percent in 2020, recovering by 1.5 percent this year and 3.3 percent in 2022, but remaining below pre-Covid-19 levels over the next two years.

The consensus among analysts polled by the Czech News Agency is that the 2021 budget deficit may be even higher, even assuming that the Covid-19 pandemic abates as vaccination drives conclude by autumn.

Illustrative photo: Artjom Beljajkin,  Unsplash / CC0

Meanwhile, the economist Lukáš Kovanda cautions that another wave of economic fallout from the pandemic will likely hit many businesses that weathered the storm in 2020, a year that saw the fewest companies registered in the Czech Republic go bankrupt since 2008, when the global financial crisis hit.

“I think the impact will come this year, that the bankruptcies will come with the winding down of emergency measures of the state – the support of employees, the moratorium on loan payments and so on. Last year, we bought some time by accumulating debt, but this year there will be no money for it. Therefore, from an economic point of view, this year will be worse.”

The silver lining, Mr Kovanda says, it that despite some missteps – failing to take a longer-term view over the past five years of rapid economic growth to invest in things like health care and pension reform – as in 2008, the 2020 crisis was an external one. So, the Czech economy could rebound faster than now anticipated.