Economy - overview: Czechia is a prosperous market economy that boasts one of the highest GDP growth rates and lowest unemployment levels in the EU, but its dependence on exports makes economic growth vulnerable to contractions in external demand. Czechia’s exports comprise some 80% of GDP and largely consist of automobiles, the country’s single largest industry. Czechia acceded to the EU in 2004 but has yet to join the euro-zone. While the flexible koruna helps Czechia weather external shocks, it was one of the world’s strongest performing currencies in 2017, appreciating approximately 16% relative to the US dollar after the central bank (Czech National Bank - CNB) in early April ended its cap on the currency’s value, which it had maintained since November 2013. The CNB hiked rates in August and November 2017 - the first rate changes in nine years - to address rising inflationary pressures brought by strong economic growth and a tight labor market.
After slowly recovering from a steep recession in 2009, the Czech economy again fell into recession in 2012 and 2013 because of a slump in demand within the EU and government austerity measures. Inflows of EU development funds underpinned a rebound in 2014-15, with GDP growth reaching 4.5% in 2015, followed by a slowdown in 2016 largely due to a cyclical lag in EU funding in connection with a new EU budget cycle. The Czech economy was one of the EU’s best performers in 2017, with broad-based growth of nearly 4.5% and an unemployment rate of 2.8%, one of the lowest rates in the EU.
Since coming to power in 2014, the new government has undertaken some reforms to try to reduce corruption, attract investment, and improve social welfare programs, which could help increase the government’s revenues and improve living conditions for Czechs. The government introduced in December 2016 an online tax reporting system intended to reduce tax evasion and increase revenues. The government also plans to remove labor market rigidities to improve the business climate, bring procurement procedures in line with EU best practices, and boost wages. The country's low unemployment rate has led to steady increases in salaries, and the government is facing pressure from businesses to allow greater migration of qualified workers, at least from Ukraine and neighboring Central European countries.
Long-term challenges include dealing with a rapidly aging population, a shortage of skilled workers, a lagging education system, funding an unsustainable pension and health care system, and diversifying away from manufacturing and toward a more high-tech, services-based, knowledge economy.
Definition: This entry briefly describes the type of economy, including the degree of market orientation, the level of economic development, the most important natural resources, and the unique areas of specialization. It also characterizes major economic events and policy changes in the most recent 12 months and may include a statement about one or two key future macroeconomic trends.
Source: CIA World Factbook - This page was last updated on January 20, 2018
