Czech Republic: IMF Executive Board Concludes 2018 Article IV Consultation

IMF News, June 26, 2018

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Real GDP grew 4.4 percent in 2017, led by strong domestic demand.
Growth is projected at 3.7 percent for 2018.
Risks: labor shortages constraining future growth; decline in global trade (such as from increased protectionism) is a major risk for a small, externally dependent economy.
Longer-term growth will depend on productivity compensating for a decline in labor supply.

Unemployment rate fell to a record low of 2.3 percent in April 2018, even with increased participation.
Real wage growth reached 6.5 percent in Q1 2018.
Firms report hiring problems, especially for workers with appropriate skills, with more than one vacancy per unemployed person.

Headline and core inflation are close to the target of 2 percent.
The nominal effective exchange rate appreciated by 6 percent since the CNB lifted the floor in April 2017, notwithstanding some recent depreciation.

The central bank has gradually raised the policy rate to 0.75 percent after foreign exchange interventions ceased in April 2017.
Directors concurred that gradual normalization remains appropriate given uncertainty about the inflation outlook and interest rates still close to zero.
Directors noted the CNB should communicate readiness to raise rates earlier than currently projected if inflationary risks intensify.

The banking system is well capitalized, liquid, and profitable.
Private credit growth is in line with nominal GDP growth; household lending is growing more quickly and some households have become highly leveraged.
The CNB announced recommended limits to debt-to-income and debt-service-to-income ratios and further tightened the macroprudential stance.
Directors recommended granting the CNB binding powers over loan‑to‑value, debt‑to‑income, and debt‑servicing‑to‑income ratios to ensure enforceability and underscored the importance of better access to data for effective supervision.

Strong tax revenues and lower capital and social benefits spending resulted in an overall balance of 1.6 percent of GDP in 2017.
Public debt fell to 35 percent of GDP (driven by the fiscal balance and a negative interest-growth differential).
The overall balance is expected to be 1.6 percent of GDP in 2018 and then gradually ease to about 1 percent of GDP.
Directors welcomed continued fiscal discipline and emphasized avoiding procyclicality; they noted budgetary demands will increase over the longer term as the population ages and urged addressing long‑run spending issues related to healthcare and pensions.

Recent measures: simplification of building permits procedures; reform of regional education funding; vocational training reform to increase coordination with businesses.
Remaining challenges: increase participation and productivity as the working population ages and shrinks.
Directors recommended policies to increase participation of young women and older workers and measures to facilitate higher productivity, including:
- realigning tax incentives to guarantee the best use of resources,
- enhancing the efficiency of public services,
- improving the business environment for smaller and younger firms,
- having a unified long‑term plan for infrastructure,
- enhancing the framework for life‑long learning.

Directors commended the Czech Republic’s strong economic performance and noted strong fundamentals and a favorable outlook.
They highlighted the challenge posed by a declining labor force for long‑term growth.
Directors broadly concurred on gradual monetary normalization and welcomed additional macroprudential measures.
They suggested greater elaboration on assumptions justifying the staff’s external sector assessment would be useful.
It is expected that the next Article IV consultation will take place on the standard 12‑month cycle.

Real GDP (expenditure): 4.4 (2017); 3.7 (2018); 3.2 (2019); 2.5 (2020); [2021–23 entries in table]
Domestic demand: 4.0 (2017); 3.1 (2018)
Real wage growth: 6.5 percent (Q1 2018)
Unemployment rate: 2.3 percent (April 2018)
Policy rate (CNB): 0.75 percent (after gradual increases)
Nominal effective exchange rate: appreciated by 6 percent since April 2017
Overall balance: 1.6 percent of GDP (2017); 1.6 percent of GDP (2018 expected); about 1 percent of GDP (later)
General government revenue: 40.4 percent of GDP (2017); 41.5 percent (2018)
General government expenditure: 40.0 percent of GDP (2017); 40.6 percent (2018)
General government debt: 33.1 percent of GDP (2017); 31.7 percent (2018); projections decline thereafter (table)
Gross international reserves (billions of euros): 122.6 (2017); 122.2 (2018); 121.9 (2019)
Nominal GDP (USD billions): 213.7 (2017); 250.9 (2018); projections through 351.5 (2023)
GDP per capita (USD): 20,201 (2017); 23,690 (2018); projections through 33,000 (2023)

Press Release No. 18/258 — IMF Communications Department, June 26, 2018.