Czech economy on course for steady growth in 2015

The Czech Republic can look forward to continued steady growth in 2015, although with domestic demand taking over more of the traction than export led manufacturers, according to a leading economist. Exporters are already operating at near capacity and are facing heavy investments to boost their output, he says. Although Russian recession is looking increasingly likely and the Eurozone continues to look edgy, low oil prices could compensate for some of these external risks and keep growth on course.

Jan Bureš|Photo: Tomáš Adamec, Czech Radio

New years are the traditional time for economic analysts to get out their crystal balls and predict what’s in store for the coming 12 months and gloss over the events that caught them unawares in 2014.

Last year it was clear that the Czech Republic climbed out of its long term recession with growth based on strong exports and a recovery in spending power at home. But what are the signs for 2015 and will the cautious recovery continue or peter out?

We talked about the Czech Republic’s macroeconomic prospects with the chief economist at Era Poštovní spořitelna, Jan Bureš. I asked him first of all what were the main surprises for him during 2014.

"Basically, what I was surprised about was the pretty solid growth of domestic demand in the Czech Republic. I was also surprised by the strong recovery in investment activity. I had expected there would be a recovery, but it was stronger than I thought initially. Besides that, I think that the major surprise for me abroad was the huge drop in oil prices. And I believe that will be one of the main factors having an impact on economic developments in 2015. The drop in oil prices was a kind of black swan I would say, nobody expected that."

In theory, the drop in oil prices should help growth shouldn’t it? I mean, if you are not an oil company, you should be cheerful?

"Yes, I believe it’s going to have a positive impact in 2015 on all net oil importers. In the Eurozone, of course, it is going to push inflation even lower. But I don’t see that kind of inflation as being negative. I think that it is primarily positive. And I think that the same is the case for the Czech economy where it should have a direct positive impact on real incomes of Czech households and indirectly it should have a positive impact on the productive capacity of Czech industry."

Photo: Klára Stejskalová

Overall, how do you see Czech growth in 2015? Will it be more or less at the same level?

"I think that it might be a bit weaker. I expect growth to be around 2.0 percent this year, but it’s not going to be far from the growth recorded in 2014. The composition of the growth might be slightly different. I believe that it might more, at least at the beginning of the year, rely on the increase in domestic consumption, investment, and government spending. I believe that net exports are not going to contribute so much. "

The Czech economic scene looks fairly stable – is that the way that you see things?

"The stability is now obvious. The structure of the Czech economy has now been fairly stable for a long period. We rely a lot on industrial exports, especially manufacturing cars and machinery. For the moment we are gaining market share, especially on the European markets. What happened in the last year is that other parts of the economy started to recover, not just industry oriented towards export but also industry which is more oriented towards the domestic market. Now, the situation is more or less stable and most economists are cautiously optimistic for 2015."

On the external side, the risks seem fairly considerable. There is the flurry about the euro at the moment, there are elections in Greece, elections in Spain, elections in Britain. There is also what happens in Ukraine and Russia. There are a lot of external risks out there aren’t there, Maybe even more so than last year?

Illustrative photo: fishtik / freeimages

"There are perhaps more risks than last year. But putting them altogether it still seems that the outlook for the euro zone is still for slow growth, but growth all the same and not recession. Given all the risks that we speak about, if you look at Russia for example, the weight of Russia in the foreign trade of countries in the euro zone and countries of Central Europe is not high. And the impact of even a severe recession in Russia on Eurozone growth is, I think, going to be very limited and more or less offset by the lower oil prices that we have already talked about. There are risks, but I think that the risks are already accounted for in market expectations. "

On the Czech domestic front, how much more room is there for Czech manufacturing to produce and export more? Is there still some pent up capacity in the Czech Republic?

"I believe that exports can grow further, but for now the imports must also catch up, that is import activity and investments. Capacity utilization [in manufacturing] is already pretty high in several pro-export sectors. For exports to grow further, I believe we are going to need more investments in the coming years. That is one of the reasons why net exports are not going to be such a contributor to GDP growth in the coming years as import intensive investments are going to weigh on the overall external balance in the coming years. "

I know you are an economist, but I want to put you on the spot a bit and ask you if you were an investor what sort of things you would be investing in in the Czech Republic if you had a few million crowns to spend: buying property, shares, bonds or a new car?

Photo: Grant Cochrane / FreeDigitalPhotos.net

"That is a pretty difficult question. The Czech market is pretty small, especially the Czech capital market. So it is difficult to put your money into the equity market, which would be the obvious solution if there was an equity market which was representative of the Czech economy. But there is no such market, on the Czech equity market you have mainly banks and some energy companies and no real manufacturers or car markets. So it is difficult to put your money into the equity market because it is small and it’s difficult to diversify your position. Bond are also problematic. As you probably noticed, the yields of Czech bonds are not far from those of German bonds and these are extremely low. The 10-year yields are at record low levels and I would not consider them to be a good investment now. Therefore, I consider that one of the solutions could be to look abroad for more attractive yields out of the Czech Republic as a small investor or to think about the real estate market where the yields are better in comparison with bond yields and I believe it’s more attractive than the Czech capital market. "