Czech Republic Politics May 2017

Czech Republic

Czech Republic: Government backtracks on resignation after political dispute, healthy economic performance set to continue

May 8, 2017

After announcing that he and his entire cabinet would be resigning as a means to oust his deputy and finance minister Andrej Babis, Prime Minister Bohuslav Sobotka of the centre-left Social Democratic Party swiftly backtracked on the decision on 5 May. Sobotka’s reversal was prompted by a meeting with the head of state, Milos Zeman, in which Zeman indicated that he would interpret the resignation as Sobotka’s own, leaving the cabinet—including Babis—in place. As a result, Sobotka will now seek to sack Babis, pitting him yet again against the centrist ANO 2011 party which Babis heads.

This political turbulence comes after months of dispute between Sobotka and his main political rival Babis over the latter’s alleged involvement in corruption scandals. Sobotka’s scope for action has been limited by the constraints of coalition politics—his cabinet comprises three parties, and the post of finance minister was given to Babis in early 2014 as part of the deal following the 2013 parliamentary elections. Sobotka’s announcement of his government’s resignation, prior to Zeman’s intervention, was largely interpreted as an attempt to reduce ANO 2011’s lead in opinion polls ahead of October’s already scheduled election, by highlighting Babis’ economic wealth and supposed tax avoidance.

The economy appears set to continue performing healthily despite the political dispute, as private consumption is being underpinned by rising wages and a strong labor market and strengthening external demand is supporting manufacturing activity. Early polls suggest that ANO 2011 will win the next parliamentary elections despite the controversy over Babis, and the party’s commitment to fiscal responsibility and its business-friendly low-tax political platform should, if anything, further strengthen the Czech economy. FocusEconomics analysts expect the economy to grow 2.6% in both 2017 and 2018.

Commenting on the outlook ahead, Pavel Sobisek, Chief Economist at Unicredit, adds:

“Strong domestic and export demand will help economic growth stay close to its potential (around 2.5% yoy), while labour market conditions are expected to tighten further. […] As fiscal policy has remained very tight in the past couple of years, there is scope for more public spending before elections while keeping the budget deficit below 3% of GDP.”

Author: Massimo Bassetti, Senior Economist

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