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Czech Republic Special July 2018

Czech Republic: New coalition talks to end political deadlock amid resilient growth dynamics

An eight-month political stalemate is set to finally come to an end following successful coalition talks between the ruling centrist ANO party, led by Prime Minister Andrej Babis, and the center-left Social Democratic party (CSSD). President Milos Zeman appointed the two-party cabinet on 27 June following an internal referendum vote by the CSSD membership on 15 June. The proposed ANO-CSSD coalition will now face a confidence vote in parliament, which will likely take place on 11 July. Given they hold only 93 of 200 seats in parliament, ANO-CSSD will need to rely on support from the Communist party to survive the confidence vote. Having pushed for certain concessions, the Communists have indicated their support for the coalition and appear to be setting the stage for an end to the country’s extended run without a fully-fledged government.

A new Babis administration would stand to oversee an economy that has been performing exceptionally well in recent quarters. Moreover, following Babis’ stint as caretaker following last year’s vote, the new government is not expected to significantly alter the economy’s current growth trajectory. If the confidence vote succeeds, the new government is set to implement policies that could add further impetus to the economy. Buoyant economic activity—the Czech economy was among the EU’s best performers last year—has boosted tax revenues and given the government space to achieve a comfortable fiscal surplus. Such margins could enable the ANO-CSSD coalition to follow through on its promises of raising public sector wages, cutting taxes, hiking pensions and boosting infrastructure investment. On affairs concerning the EU, coalition heads have pledged to maintain warm relations with the bloc, although their staunch anti-immigration stance and opposition to migrant quotas will keep them at odds on policy. As for the euro, the coalition is set to remain opposed to its adoption in the near term.

Given stellar economic growth, driven by falling unemployment and rising wages, there stands little reason for the new government to shift its approach on economic management. Since serving as leader of the caretaker government, Babis has overseen a robust economy, and this is set to continue under the proposed ANO-CSSD coalition. If the 11 July confidence vote falls through, however, Babis has stated that early elections could be held next spring. Regardless of the vote’s outcome, FocusEconomics Consensus Forecast panelists expect solid growth in the near term; they see the economy expanding 3.5% in 2018 and 3.0% in 2019.

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