Czech Republic Country Risk Report Q4 2018
Real GDP growth in the Czech Republic peaked in 2017, but will remain solid over the coming years and outperform the wider EU. However, in the absence of strong productivity gains, the country's tight labour market will put upward pressure on unit labour costs, and begin to weigh on the country's competitiveness.
With a budget surplus in 2017 and already low public debt load of around 35% of GDP, the fiscally conservative stance of the next Czech government will see fiscal metrics improve further, underpinning the country's robust sovereign profile.
Although the Babis government will be positive for growth on account of its business-friendly reform and tax cutting agenda, its populist ideologies will align the Czech Republic closer with eurosceptic peers in Poland and Hungary, raising tensions with the EU.
After becoming the first CEE central bank to hike interest rates in 2017 on account of rising inflation, the Czech National Bank will continue a relatively aggres-sive rate hiking cycle in 2018, supporting further koruna appreciation.
On the back of strong household demand, the trade surplus will slightly narrow, but the country's current account will stay relatively balanced in the years ahead.
Wage rises and increasing labour unit costs will erode the Czech Republic's cost advantage over its more developed regional peers, such as Austria and Germany, in the medium term.
Emerging political risks in the eurozone on account of Italy's populist government may have negative consequence for the recovery in fixed investments.
Further and more substantial EM FX volatility is possible.
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