Czech Republic Politics September 2017

Czech Republic

Czech Republic: Broad policy continuity expected following Czech vote in late October

October 2, 2017

In the midst of robust economic growth, the Czech Republic will go to the polls on 20 and 21 October to elect a new parliament. The new government will inherit one of the fastest-growing economies in the European Union, which also enjoys enviable fiscal parameters, with public debt below 40% of GDP, and a healthy fiscal balance. Because the two largest parties, which have both governed in a coalition led by Prime Minister Bohuslav Sobotka, agree on a fiscal responsibility approach, the outcome of the vote should not significantly change the country’s economic outlook and the government’s fiscal stance.

Both of the main leading parties, the centrist Action of Dissatisfied Citizens (ANO) and Sobotka’s Czech Social Democratic Party (CSSD), have market-friendly platforms. Furthermore, the economy’s outlook is expected to remain bright regardless of the makeup of the new government. If the ANO prevails, the country could adopt a more fiscal conservative policy, while in the event CSSD wins, the country’s fiscal stance is likely to remain relatively unchanged. However, if the CSSD enforced the bank tax proposal contained in the party’s electoral manifesto—which is not likely—the banking system could face reduced profits.

Preliminary polls point to a victory for the ANO, followed distantly by the CSSD. Trailing in the polls are the Communist Party of Bohemia and Moravia (KSCM) and the liberal-conservative Civic Democratic Party (ODS). Following the elections, the parliament could be comprised of up to eight different parties, four of which could be allies of the ANO party. However, Andrej Babis, the leader of the ANO, may faces challenges in creating a government. Babis, the former finance minister, has been accused of fraud and some officials have vowed not to work with him if the accusations are true. Babis claims that he is innocent and that the charge is politically motivated. The fragmented political landscape could generate modest uncertainty as parties negotiate to form a government; this will, however, be similar to past situations, as the Czech proportional representation system inevitably leads to post-election consultations, and should not have significant effects on the economy.

The Czech economy is firing on all cylinders, underpinned by solid domestic and external demand. On the domestic side, household spending is being supported by rapidly growing wages and extremely tight labor market conditions, while the inflow of EU funds is buttressing fixed investment. Moreover, the substantial policy continuity which should follow the elections will make it possible to reduce the debt to GDP ratio and thus allow the government to build solid fiscal buffers to face unexpected economic downturns.

Against this backdrop, FocusEconomics Consensus Forecast panelists expect the Czech Republic’s GDP to grow 3.8% in 2017, which is up 0.5 percentage points from last month’s estimate. For 2018, panelists see GDP growth of 3.0%, which is up 0.2 percentage points from last month’s forecast.

Author: Massimo Bassetti, Economist

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