Chesnum Spravy is the media partner of Prosperity Index
The sharp increase in inflation and the still low added value of Czech products are the main reasons for the decline of the Czech economy, according to the findings of the Czech Sporitelna project and the data portal Europa v Date. Ranking of the European Union.
For a long time, we may have been reassured by relatively low public debt, but even that has been growing significantly recently.
The Czech economy is hampered by high inflation
By 2022, we have recorded the steepest rate of inflation in history, surpassing figures from the so-called “Great Recession” of 2008. Inflation in the Czech Republic reached 14.8% last year, the fifth highest figure, according to Eurostat. In the whole Union. Only Hungary and the Baltic countries recorded even higher price increases last year.
Most economists consider inflation to grow at 2% annually as optimal. However, last year, all EU countries exceeded this limit.
Prosperity index of the Czech Republic
Česká spořitelna and Data Portal Europe’s joint research measures and analyzes the prosperity of the Czech Republic and compares it with other European countries. The index considers prosperity in a broad socio-economic framework and measures not only the performance of the economy, but also factors such as quality of life, education, health or housing.
The index is based on analysis of public data sources (Eurostat, OECD, etc.) and analytical data from Česká spořitelna. It follows last year’s program of the same name.
- State of the Economy – Read more here
- Digitization and Infrastructure
- Quality of the labor market
- Education and Research
According to economist A Former Representative of the Czech Republic to the World Bank, Jana Matesova Three factors caused a sharp rise in Czech inflation: “Firstly, too loose budget discipline is to blame, which was largely unsecured in the second half of 2020 and in 2021 with respect to the epidemic and the state. The potential of the Czech economy, in general, was not economically secured. Second, it was poor regulation of the energy market and thirdly , the often dominant position of some sellers in the Czech market. This allows the abuse of significant market power, which the state has so far been unable to successfully prevent. For surplus goods such as electronics or clothing, the consumer himself gradually resolves this with deferred demand, but for basic needs such as food, of course, this does not work. ” explains Matsova.
According to him, the collapse of multinational supply chains, governments’ loose monetary and fiscal policy, but also the effects of the Russian invasion of Ukraine, which affected economies across Europe, contributed to the sharp increase in inflation.
But rising prices logically bring with it an effort to save. In the 3rd quarter of last year, consumption by Czech households fell by 6% year-on-year, the largest drop in any EU country, while the biggest drop the Czech economy has ever experienced. “It is common for Czechs to spend in prosperous times, but in times of crisis they become deeply depressed and pessimistic,” says Česká sporitelna analyst Tereza Hrtúsová.
According to a regular Eurobarometer survey from last autumn, only 8% of respondents expect their living conditions to improve in the next year, the lowest in the entire EU. More than 50% responded that, on the contrary, they expect living conditions to worsen, one of the largest shares after Slovakia.
“People now think more about their purchases, take advantage of discount events more, but also go abroad to buy food. According to our data on card transactions, in 2019 the share of Czechs spending on food in Poland was about 0.5%, but last year it was already was 2%, i.e. 4 times higher,” pointed out Teresa Hartuzova.
Public debt is increasing
Czech debt has long been relatively low, but its trend is alarming because it has been growing significantly recently. In a European comparison, we fell from a best fourth to sixth place in this category. In the third quarter of 2022, only the Czech Republic increased its public debt year-on-year.
“I would not exaggerate the figures for a quarter. The size of the general fiscal deficit will be important throughout 2022, which will ultimately be somewhat better than expected and will be less than 4% of GDP,” National Budget Council Chairman Mojmir Humble commented on the new data. . However, at the same time, he indicated that the prospects for securing an increase in public debt are not good. “Large financial surpluses of municipalities, lower costs for energy price compensations for large enterprises allocated until 2022 or settlement of claims of the Financial Market Guarantee System on behalf of Sberbank are examples of completely unplanned events,” Hambl thinks. According to him, without a fundamental change, the Czech Republic is heading for a period of systematic and rapid increase in public debt in the coming years.
According to the head of the National Budget Council, the reason for the increase in debt is the systematic reduction of public budget revenues, including the cancellation or reduction of many taxes, combined with an increase in spending in areas such as education, health and pensions. Humble already sees the starting points in the measures put forward by the government’s National Economic Council last November.
These mainly include raising certain taxes, reducing unemployment benefits, reducing the prison population, or improving the functions of public administration. “The more we can implement from this list, the sooner the threatening structural imbalance of public budgets will be reduced. There are no popular or painless paths,” Hambl warns.