MNI INTERVIEW: Weak Germany To Hit Czech Growth "For Years"

Czech inflation should average around 3% this year, with the public sector deficit slightly lower than in 2023, Czech Fiscal Council Chair Mojmir Hampl told MNI.

But Germany’s economic weakness will drag down the performance of Czech companies for years to come, Hampl, a former Czech National Bank vice governor said in an interview. The Czech Republic is also unlikely to move closer to joining the euro despite reports that the government wants to reexamine the case for the joining the currency area’s waiting room, he added.

January’s lower-than-expected inflation of 2.3% came as a surprise, “but if we can maintain that level throughout the first quarter of the year I think we can declare that the major threats are over,” he said. Finance Ministry projections for annual inflation of 3.1% are “reasonable and realistic,” said Hampl, CNB vice governor from 2008-18. (see MNI INTERVIEW: Czech Rates Too High- Ex-Deputy Governor)

Fiscal consolidation has been “mildly anti-inflationary,” Hampl said, but while January’s changes to value-added tax will have short-term impact, they are not significant from a monetary policy perspective.

The public sector deficit for 2023 will end up at around 3.6% of gross domestic product, including a municipal level surplus of more than CZK60 billion, he said. The preceding year saw a better-than-anticipated 3.2% shortfall - an improvement Hampl, a member of the government’s Council of Economic Advisers, attributed to higher corporate tax revenues.

FISCAL DEFICITS

This year deficits this year are running at around 3%, Hampl said, adding that while 2% would be achievable, no additional consolidation packages can be expected until after the October 2025 general election. Even then, increasing personal income tax levels to those last seen in 2021 would probably prove politically untenable, leaving a structural deficit of -1% out of reach.

This year’s corporate tax take will be flat, amid rapid deteriorations in company expectations across the region. Germany’s poor performance in particular will have a negative impact on the Czech corporate sector in 2024 "and beyond,” he noted. While high energy prices which have eroded the competitiveness of Czech companies are easing, they now have to contend with overcapacity and low demand.

“This is a new phenomenon in this region, and in the production core of the EU,” he said.

The Czech Republic faces difficult decisions as it pursues economic restructuring and climate goals and looks to boost defence spending, he said.

“Either it will have to be financed through increased deficit and debt, or they will have to make decisions about what are not priorities anymore, or start increasing taxes. None of these options is politically attractive. So in answer to the question of whether fiscal consolidation is compatible with the aims of the European Commission - put simply, no.”

With the Czech government reexamining the case for the joining the eurozone waiting room, ERM II, Hampl, a member of the working group set up to explore the issue, said he doubted any policy change will come from the exercise.

“It's very unlikely that the future government will be willing to continue in the footsteps of its predecessor. It will end up with verbal declarations that we have done our best to prepare the economy for membership of the eurozone by cutting the public deficit, but at the end of the day there will be no decision.

“But we will end up if everything goes right and there are no surprises in 2025 with slightly better public finances than at the beginning of this political cycle. “