Czech Republic: Economy So Far So Good

IMF News, October 3, 2017

Source details

Growth at 2.4 percent is characterized as strong.
Unemployment at 3.3 percent is the lowest in the European Union.
Government debt is described as low.
The Czech Republic must continue to improve the quality of its human capital and monitor mortgage loans if growth is to last.

The central bank removed the upper limit of the euro exchange rate in April after three and a half years because inflation had started to move upwards.
Rationale: Inflation was brought back, "close to or even slightly above the target" and assessed to be sustainable.
Market reaction: No extraordinary volatility on the foreign exchange market; the koruna "started to appreciate slightly, and I'd say, unexpectedly."
Interpretation: Appreciation signaled the beginning of a tighter monetary stance.
Policy communication: The central bank prepared the market and public beforehand.

Recent and projected growth:
- "Growth at 2.4 percent" (current characterization).
- "Growth this year could be close to, or even over three percent of GDP."
- Potential growth estimated "about 2.5 percent."
Macroeconomic indicators are "looking very positive."
Investment dynamics:
- Investment cycle is "very much linked to the seven-year budgetary cycle of the European Union and the arrival of the EU funds."
- Need to pay attention to investment in human capital.
Wages and real wages:
- "Wages are growing vigorously, at about 5 to 6 percent each year."
- With inflation "close to 2 percent," this translates into "a significant growth for real wages for the last three years" and the trend is expected to continue next year.
Policy implication: "Public or other investment in education is therefore also a relevant discussion in the Czech Republic."

Household indebtedness: "The indebtedness of Czech households is still far below the European standards."
Recent credit developments: Significant recovery in household credit—mainly mortgages—driven by very low interest rates and fast-growing wages.
Housing market supply constraints: Lack of available properties in attractive locations such as Prague "definitely pushes real estate prices up."
Central bank response and recommendations:
- Make the public and other authorities aware of risks from excessive debt.
- Use measures such as countercyclical buffers for banks.
- Issue recommendations in the case of some households.

Political discussion on euro adoption is ongoing and variable in intensity.
Short- to medium-term outlook: "Over the next five to seven years, I imagine that we would not become a member of the eurozone."

Historical role: The IMF was "crucial during our transition to a market economy in the beginning of the 1990s."
Subsequent engagement: After financial support was no longer needed, the Czech Republic sought technical advice from the IMF.
FSAP involvement:
- The Fund’s technical expertise "came in very handy with the financial stability assessment program (FSAP)."
- Lessons from a "quite a huge banking crisis in the late 1990s, beginning of 2000s" informed reforms.
- The Czech Republic was "one of the countries piloting the IMF's FSAP" and was "the first country to ever to publish the entire set of financial stability assessment documents."

IMF Country Focus — Czech Republic: Economy So Far So Good (October 3, 2017).