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27 April 2019

Economists: No crisis looming for Czech economy but a slowdown is inevitable

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At a lunch briefing, organized by the Netherlands-Czech and the Italian-Czech Chambers of Commerce, economists Miroslav Singer, Jakub Seidler and Lukáš Kovanda discussed the prospects of an economic crisis impacting the Czech Republic and the health of the Czech economy. Their conclusions suggest that catastrophic scenarios are far from becoming a reality.

Libor Akrman,

Will the Czech economy be soon hit by a crisis? Three economists were seeking the answer at a joint event held by the Netherlands-Czech Chamber of Commerce and the Italian-Czech Chamber of Commerce and Industry. Keynote speakers included Miroslav Singer, chief economist of Generali; Jakub Seidler, chief economist of ING Bank Czech Republic; and Lukáš Kovanda, chief economist of Czech Fund.

Around fifty members of both Chambers heard interesting keynotes by the three speakers. Miroslav Singer opened with an analysis of the current economic situation. He noted that it was necessary to distinguish between the current situation and the crisis that emerged in 2008 whose impacts we continued to feel for several subsequent years and that had repercussions in economies around the world. “This is not a crisis, but definitely a slowdown.”

Mr. Singer compared GDP growth in the crisis years with the current situation globally and in selected countries. “A new major recession is unlikely, but the growth is bound to slow down,” the former Czech National Bank governor said, adding that GDP decline is nowhere to be seen in developed countries.

He claims we should think about the factors that might induce or accelerate the slowdown. For Europe he mentioned “Southern wing” in particular, which has been experiencing troubles, and which, in consequence, poses a risk primarily for the European Union. The rest of the world would most likely feel quite limited indirect effect.

“The fact that a slowdown is to follow after an exceptionally long period of growth, whose duration is a result of the extraordinary depth of the previous decline, should not come as a surprise, on the contrary,” Miroslav Singer pointed out.

In his opinion, economic developments are affected by politicians as well, but political risks have been on a decline. “A trade war between China and the US is now less likely than a few months ago,” he added. In his keynote, Mr. Singer also noted that although Czech economic growth had been decelerating in recent years, a GDP hovering around two percent “definitely could not be called a crisis”. Nevertheless, it will result in a certain decrease in the living standard of the citizens.

A long cycle

Jakub Seidler followed on from what Miroslav Singer said and agreed that there a crisis was unlikely to hit the Czech Republic or the world economy. He spoke about economic cycles as Mr. Singer did, mentioning the relatively long duration of the current one. “We can see that the cycle is in progress and economies have been decelerating for approximately six years but have already accommodated,” he said.

He noticed that signs of a slowdown could be seen in the Purchasing Managers’ Index (PMI), primarily the Manufacturing PMI. While the global, European and the US Manufacturing PMI are on the decline, Chinese Manufacturing PMI rebounded and has exceeded 50 points, which suggests optimism among manufacturing companies. However, these companies are responsible for about a third of growth, according to Mr. Seidler. “PMI in the service sector has been stable and optimistic,” he added.

He said that were multiple indicators of economic stability, such as GDP predictions that have often seen downward adjustments in the past years. “Predictions for the coming years do not foresee significant fluctuations but expected GDP figures are lower,” he noted.

Jakub Seidler believes that developments in China are going to be decisive for global economy. “If China ignites growth by fiscal and monetary stimuli, it will stimulate global growth. The Chinese economy (GDP) rose very strongly over the past decade, but at the expense of a steep increase in both corporate and household debt,” ING’s chief economist said.

Chinese economic developments will affect the rest of the world, including European, German, and consequently Czech economy.

China and the US as decisive factors

Czech Fund’s chief economist Lukáš Kovanda agreed with Jakub Seidler that the Chinese economy is going to have a major impact on the global scale. He showed a series of charts to demonstrate a turnaround in the Chinese industry after a minor slowdown.

“For the Czech economy, Germany is in an analogous position as China for Germany. Although Germany finds itself in a technical recession, we can expect that this is a temporary situation. Fiscal stimulus will accelerate growth in China and the local industry, which will move into an improvement in European economies,” he explained.

Mr. Kovanda also compared economic performance of the four Visegrad Countries (V4). In comparison with Hungary, Poland, and to some extent with Slovakia, too, Czech economy has experienced the most significantly deceleration. In his opinion, this is due to the economy hitting its capacity limits.

“We have the lowest unemployment rate not only among EU members states but also among OECD countries, which poses a problem for employers. That is why we have hit productivity limits harder than the other V4 countries,” he added. Besides, we are more dependent on German economy than our V4 peers. “On the other hand, the other countries have a higher debt-to-GDP ratio, which puts us in a more favourable position,” he noted.

Further economic development will be affected by the situation overseas, especially by US president Donald Trump’s policies. In Kovanda’s opinion, the US leader is going to be less radical going forward than in the past.

“Trump will strive for re-election, which he will want to support by good economic results. Continuing trade wars and other controversial decisions might damage his position in this respect.”

Should a crisis occur regardless, Czech economy is better prepared than most European countries. “We have a higher Base Interest Rate than the rest of Europe, which gives us a space to stimulate growth by slashing the rate. This is coupled with low indebtedness, which would allow the government to take loans for investments to stimulate economic growth too,” Lukáš Kovanda concluded.

Questions from the audience focused on Czech crown’s exchange rate predictions and on government policies. The economists do not expect any major fluctuations of the Czech currency towards either euro or the US dollar. They believe that the Czech cabinet will follow a reasonably consistent line and avoid adopting populist measures at the expense of strategic initiatives.

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