Czech Republic

After the collapse of communist regime, the country formerly known as Czechoslovakia was dissolved into its constituent states, the Czech Republic and the Slovak Republic. The Czech Republic is located in Central Europe. The country is a typical landlocked that is partly hilly and partly flat. One-third of the country is formed by highlands and mountains full of lovely forests and meadows. The Czech Republic is one of the most stable and prosperous of the post-Communist states of Central and Eastern Europe. GDP per capita at purchasing power parity was $27,100 in 2011, which is 85 per cent of the EU average. Czech financial system has remained relatively healthy but the economy remains sensitive to changes in the economic performance of its main export markets, especially Germany.

The eurozone ongoing crisis was by far the most important factor that influenced the Czech economy in 2011. This is especially true for the second half of the year, after global stock indexes dropped sharply in August, and the eurozone panic accelerated in the last quarter. The fiscal outlook started to deteriorate in the first half of the year. The budget deficit grew faster in the first eight months of 2011 than it was in the same period in 2010. The general government balance is estimated to reach negative 3.7 per cent of GDP. The government debt to GDP ratio was 40.5 per cent of GDP in 2011. The Finance Ministry also revised its 2011 GDP growth estimate to 1.9 per cent.

Since the second half of 2011, the Czech economy has been in a shallow recession, and this situation will likely continue for the rest of 2012. The government expects GDP to decrease by one per cent this year. Consumer prices are expected to rise by around 3.3 per cent in 2012. The unemployment rate started to decline at the beginning of 2010 from a level close to eight per cent to end on 6.7 per cent in the fourth quarter of 2011. The unemployment rate should show a tendency towards slight growth in 2012. It expected to reach 6.9 per cent this year and further to 7.3 per cent in 2013. Economic activity should, however, gradually recover in the course of 2013 when it should pick up to 1.5 per cent in 2013 while the average inflation rate should reach 2.1 per cent.

The finance ministry plans to trim the budget revenue and expenditure by 41.2 billion crowns (£1.31 billion) in 2013 compared with the previous budget plan, according to the Reuters. The new budget maintains the central government deficit at 100 billion crowns, resulting in expected total fiscal gap at 2.9 per cent of GDP. Total revenue is projected at 1,043.7 billion crowns, down from 1,090 billion this year while total spending is seen at 1,143.7 billion, down from 1,195.3 this year. The proposed cuts include a 16.5 billion drop in spending on projects co-financed from the European Union development funds. It also includes a 2.7 billion cut in spending on research and development.

The Czech central bank forecasts the fiscal deficit will be smaller than the government’s target next year. The public-finance deficit will be 2.4 per cent of GDP in 2013. The deficit should be 3.3 per cent of GDP this year, 0.1 percentage point higher than the government’s latest estimate. The Prime Minister is pushing through measures, including higher taxes and spending cuts, to trim the budget gap to less than the EU’s three per cent limit as the strategy has helped bring funding costs to record lows. The fiscal steps are depressing household spending and will continue to curb economic growth according to the central bank.

Slovakia

Slovakia is a relatively small, landlocked, but well-integrated, export-oriented economy. In 1993, Slovakia peacefully broke away from the Czech Republic. Following the establishment of the Slovak Republic, the country saw robust economic growth. In 2004, Slovakia became a member of the European Union. It subsequently joined the Economic and Monetary Union, and introduced euro notes and coins in January 2009. Aided by institutional and structural reforms, the Slovak economy rapidly integrated with its EU neighbours. Solid progress on privatization and low labour costs attracted substantial foreign direct investment. The high levels of FDI inflows helped to boost economic growth.

According to the European Commission’s Spring 2012 forecast, real GDP will grow by 1.8 per cent in 2012 and is projected to be 2.9 per cent in 2013. The general government gross debt is forecast to increase from 44.6 per cent of GDP in 2011 to 47.1 per cent of GDP in 2012. The Slovak central bank lowered its forecast for the nation’s economic growth next year to two  per cent from a previously projected 3.1 per cent, citing the euro region’s debt crisis and austerity measures. The estimate for 2012 GDP growth was raised to 2.7 per cent from the 2.5 per cent predicted three months ago as the expansion in the first half was faster than expected amid a surge in car-making. It grew 3.3  per cent in 2011.

The pace of growth will continue slowing in 2013 as it will be affected by austerity measures. Slovak Finance Minister forecasted Slovakia’s 2013 economy growth rate to slow more than previously expected, as the country sees weaker foreign demand for its exports, and the bitterness of austerity measures at home. The ministry lowered its expectations for the heavily export-reliant economy’s growth to 2.1 per cent next year, from a previous estimate of 2.6 per cent. Strong start to the year is not likely to continue as external demand is deteriorating and a Greek exit still cannot be ruled out entirely. Assuming that the eurozone will stay in its current shape, GDP is anticipated to grow by 2.4 per cent in 2013.

The parliament passed an austerity package in an attempt to bring the deficit down from 4.8 per cent currently to three per cent in 2013. Inflation measured using the harmonised Index of Consumer Prices reached 3.8  per cent year-on-year in September, the same level as in the previous month. The average annual inflation rate for the past 12 months reached four-  per cent, according to the Slovak Statistics Office. The central bank raised its projection for average inflation in 2012 to 3.7 per cent from 3.5 per cent, driven by commodity prices. Price growth is set to slow to 2.4  per cent in 2013. In draft proposal of the budget for next year, the government has pledged to cut the fiscal gap to 4.6 per cent this and 2.9 per cent next year and has designed a tax-the-rich austerity package to do so.

The government will attempt to keep the budget deficit under 3  per cent of GDP despite a gloomier-than-expected prediction that the state will collect €233 million less in tax and payroll tax revenues next year. The ministry estimates that additional 629.3 million euros ($827.37 million) in budget savings or new revenues were needed to hit the 2013 fiscal target. The budget targets a deficit for 2013 of €3.06 billion, €616 million lower than the budget deficit planned for this year at €3.675 billion.

Revenues are planned at €14.177 billion, €552 million higher than this year, while spending compared to 2012 has been curbed by €65 million, standing at €17.235 billion. The government made a significant deficit reduction in 2011 and plans additional cuts in 2012.

Slovenia

Slovenia, which joined the euro zone in 2007, was badly hit by the global crisis and is now struggling with a new recession after a mild recovery in 2010 and 2011. Slovenia’s GDP will shrink two per cent in 2012, according to an estimate by the Organization for Economic Cooperation and Development. That compares with a 1.4 per cent contraction forecast by the European Commission and a 0.9 per cent drop estimated by the government’s economic institute. The IMF mission expects the economy to contract by 2.2 per cent in 2012 and by some one  per cent in 2013 on the back of continued deleveraging, sluggish external demand, and fiscal tightening. As a result of weak economic activity, core inflation is low and the current account continues to improve with a moderate surplus expected for this year.

The economy has been contracting since the beginning of 2011 and the weakening of activity is expected to continue, driven by strong consolidation and ongoing deleveraging in the financial and corporate sectors. Unemployment is unlikely to stabilise before 2013. Inflationary pressures are likely to remain in check, owing to the large economic slack. The government adopted an ambitious consolidation package with a view to bringing down the budget deficit to below three per cent of GDP in 2013. The consolidation measures will weigh on activity and additional structural reforms are necessary to return to growth, notably by increasing the stability of the banking sector, enhancing labour market flexibility and reforming the pension system.

According to the European Commission, 2012 spring forecast, Slovenia’s economic activity is projected to further contract in 2012, by 1.4 per cent, before rebounding in 2013. Unemployment is foreseen to continue rising. Slovenia lacked a fully-fledged budget for 2012 until mid-May, creating uncertainty, notably over the achievement of the 2012 deficit target. Following the early elections of December 2011, Slovenia is now in the condition to address the structural reforms it needs. The challenges already identified last year remain relevant in 2012. Indeed, the intensification of market pressures lends new urgency to credible and durable fiscal consolidation, cleaning of bank balance sheets and pension reform. IMF says Slovenia is in the midst of a double-dip recession.

The economy is now suffering from the negative feedback loops of recession, bank deleveraging, and corporate distress against the background of pre-existing structural weaknesses. The structural adjustment in 2012 is already significant and the headline deficit is projected to decrease from 4.3 per cent of GDP to around 3.5 per cent of GDP This deficit is slightly higher than planned, mainly due to weaker revenues. The government should focus on the structural balance rather than on headline targets. Failure to overcome the challenges could hamper the economy’s adjustment and return to growth.

Economists from London to Warsaw expect Slovenia is on course to seek international assistance as the economy is on the verge of entering its second recession in three years and its lenders rely on the European Central Bank loans for liquidity.

Slovenia’s credit rating was cut by Moody’s Investors Service, Fitch Ratings and Standard & Poor’s in early August because of domestic banks’ need for fresh capital. All three rating companies keep a negative outlook on the sovereign. Recently, the Slovenian Ministry of Finance confirmed that the country’s largest bank needed additional assistance of €500 million. The Nova Ljubljanska Banka (NLB) holds bad loans totalling €1.5 billion. It had already received emergency

Slovenia has had to raise its earlier budget deficit target and plans to cut its public sector wage bill and raise taxes as the country tries to avoid a bailout. It is facing worse economic conditions and forecasts for the next year are also worsening. The central budget deficit is likely to reach some 2.9 per cent of gross domestic product next year, up from 2.5 per cent targeted earlier. The government had hoped to bring its general deficit below three per cent of GDP next year but that target would be missed if it has to pour more cash into its banks. The state-owned banks might need up to 1 billion euros ($1.3 billion) of fresh capital after their bad loans are transferred to a new state company at a discount.