Business Opportunities in the Czech Republic

In recent years, the trend towards strong economic activity and redressing certain macroeconomic imbalances has been a fundamental element in the development of the Czech economy. After a 6.4% growth in the previous two years, economic performance measured by the gross domestic product (GDP) rose in real terms by 6.5% in 2007 .

Economic performance and structure

The higher economic growth of the Czech Republic compared to the EU average (2.9% in 2007) has reinforced the country’s international economic position as characterized by GDP per capita. In this respect, estimates indicate that the Czech Republic now stands at 82% of the EU-27 average (measured by purchasing power parity). In absolute terms, GDP in 2007 reached CZK 3,558 billion (EUR 128 billion) in current prices. This economic performance is more than twice as high as in the mid-1990s.

Broken down by sector (based on gross value added at current prices), industry predominates with a share of 32%, much of which can be attributed to the manufacturing industry (27.5%). Agriculture’s share in gross value added is 2.8%, while the building industry accounts for 6.4%. Overall, services have a share in the gross value added currently hovering just below 60%. They include domestic trade and tourism-related services, financial and telecommunication services and services for businesses.

In manufacturing, sectors producing the highest value added progressed at the fastest pace. These sectors are production of vehicles, machinery and equipment, electrical and optical instruments, and related branches with their principal subcontractors (especially the rubber industry and plastic manufacture). Conversely, sectors requiring a low-skilled workforce (the textile, clothing and leather industries) remain depressed.

Positive developments in the Czech economy are also closely linked to investment, including foreign direct investment (FDI), which amounted to CZK 185.3 billion (approximately EUR 7.4 billion) in 2007. The FDI structure is sound, with most investment channelled into sectors and branches generating higher levels of value added. Close to 90% of all FDI comes from the EU-25.

Labour productivity (GDP per worker) growing faster than wages is a very favourable tendency for further growth of the competitiveness of industry and other sectors.

Labour market

In the past two years, certain structural deficiencies in the supply of workforce to construction and industry have undermined overly positive trends on the labour market, which is otherwise characterised by increased employment and a lower unemployment rate. There are close to five million active workers in the national economy and unemployment is approximately 6.5%. The employment rate, i.e. the share of persons with one job or a principal occupation in the number of all persons over the age of 15, is almost 60%. The share of women in total employment is 43%. The average monthly nominal wage of employees in the national economy is more than CZK 20,000 (approximately EUR 800).

The employment structure by basic economic sectors has changed dramatically in the Czech Republic over the last decade. In the primary sector (agriculture, forestry, fisheries), where employment has followed a downward trend since the 1990s, the number of workers has stabilized at 3.6% of total employment. In the secondary sector (industry, construction), the share of workers in total employment exceeds 40%. The tertiary sector (services) has enjoyed a long-term employment growth and now accounts for over 56% of total employment.

Inflation and the exchange rate

The relatively low and stable inflation in the previous two years speeded up slightly in 2007, amounting to 2.8%. This was a consequence of administrative measures (a change in the VAT rate) and, in particular, of hikes in energy and food prices. The strong Czech crown had an anti-inflationary effect.

The Czech crown generally reflects developments on the eurodollar market, the movement of Central European currencies, and global flows of venture capital. While in 1999 the exchange rate was 37 CZK per EUR, by 2007 it was just below 28 CZK per EUR. Developments in relation to the US dollar have been similar, with the tendency towards appreciation being even stronger here. In 1999, the exchange rate was 34.6 CZK per USD; in 2007 it was 20.3 CZK per USD. Developments in 2008 have driven the exchange rate to a level of around 16 CZK per USD. 

Preparations for entry into the eurozone

The Czech Republic became a Member State of the European Union in May 2004. Since then, the Czech National Bank (ČNB) and various key ministries have been gearing up for the launch of the single European currency. The ‘National Plan for the Introduction of the Euro in the Czech Republic’ has been drawn up as a roadmap for accession to the single currency; its progress is checked on regularly, once a year. Regarding the nominal convergence criteria, except the exchange rate criterion, which is tied to a participation in the ERM II exchange rate mechanism of at least two years, and the price stability criterion, where fluctuation has been recorded recently, the Czech Republic is fulfilling all conditions for entry into the eurozone.

The government deficit in 2007 was more than CZK 56 billion (EUR 2.24 billion). In relation to GDP, this is 1.6% (under the Maastricht criteria it must not exceed three per cent). The Czech Republic also easily complies with another criterion, the ratio of gross government debt to GDP, which has been below thirty per cent of GDP for a long period. According to the Maastricht criteria, government debt must not exceed 60% of GDP.

Foreign trade

Foreign trade has always been of utmost importance to the economic area that makes up today’s Czech Republic. This is still true. The Czech Republic is one of the most open economies in Europe and, indeed, the world. There is still a tendency for real exports of goods to outstrip imports, indicating that the export conditions of the Czech economy are favourable, while import conditions are very demanding.

With the volume of exports prevailing over imports, the trade balance returned a record surplus (CZK 85 billion in current prices, i.e. approximately 3.4 billion EUR), which was more than twice as much as in 2006. The Czech Republic is the only new Member State of the European Union to report a surplus in its foreign trade. Foreign trade turnover was CZK 4,859.7 billion, of which exports account for CZK 2,472.4 billion (EUR 99 billion) and imports for CZK 2,387.4 billion (EUR 95,5 billion).

A remarkable development in foreign trade has been the fundamental change of direction in Czech exports. Trade with other EU Member States is now crucial for the Czech economy not only in terms of volume, but also because it rectifies the rather inauspicious balance in trade with other countries. Whereas in the early 1990s raw materials and semi-processed products were of key importance, today the core export consists of mechanical engineering products. Machinery and vehicles now account for nearly 55% of exports, a rise by 25% as compared with the mid-1990s. Instead of finished products, the principal imports today are primary raw materials that cannot be sourced in the Czech Republic (such as crude oil). They are then processed here.

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Last update: 16.8.2011 16:02

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