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CS

Analysis of Macroeconomic Development – focused on contexts and sources of economic growth

Summary of the main tendencies

Contents
  1. The main features of the changed external conditions of the Czech economy in 2004 were the accession of the CR to the European Union and its economic upswing. The second half of 2004 and first months of 2005 saw a slowdown of economic growth in the EU, and acceleration is not expected until 2006.
  2. Employment in the CR decreases by 0.6% a year in the long term, which reduces the utilisation of labour pool and thus economic growth. Unemployment rate in the CR is roughly at the same level as the average in the EU; however, unlike the CR, employment in the EU is increasing.
  3. The CR reports a slow growth of the quality of human resources (qualifications capital) measured by the number of university graduates and number of years of study.
  4. Labour productivity decisively contributed to economic growth. In 2000-2004, the growth of labour productivity in the CR was markedly higher (by 2.7 percentage points) than in the EU15; the process of convergence further speeded up in 2004. In spite of that, the level of labour productivity converted to hours is still below 50% of the EU15 average level. \
  5. Acceleration of gross fixed capital formation is a long-term development trend. Compared to the EU member states, investment rate is above the average, which is caused to a certain extent by high investment in the environment, energy and transport infrastructure. The fast growing fixed capital-to-GDP ratio was the pivotal determinant of the dynamically growing labour productivity. Investment activities brought about considerable effects in the area of labour force saving and limited effects on production because fixed capital productivity increased only from the year 2000.
  6. The influence of macroeconomic policies on economic growth was principally neutral between 2000 and 2004. In the framework of monetary development, the growth-promoting effect of low interest rates was offset by excessive strengthening of the Czech koruna which slowed down the growth of competitiveness of Czech exports; yet they grew dynamically. The low and relatively stable inflation had a predominantly supporting effect on economic growth, with the exception of part of 2002 and 2003 when deflationary pressures set in.
  7. The fiscal development had a growth-promoting effect on transport and telecommunications infrastructure on the one hand, but, on the other hand, the long-term factors of growth like R&D and tertiary education were not importantly supported.
  8. The effect of domestic demand components on GDP growth had a volatile composition. Accelerating contribution of exports to GDP that in 2004 turned net exports contributing to GDP from the red to black figures was a strong tendency in 2002-2004. A growth-promoting trend where exports and gross capital formation dominated prevailed in the structure of domestic demand in 2004.
  9. According to the result for 2004, the Czech Republic was the only country among the CR, Hungary, Poland and Slovakia that met the Maastricht Treaty criteria for nominal convergence, i.e. frameworks of financial stability of the country. International comparison of contexts of the speed of nominal and real convergence showed that meeting the Maastricht criteria in a speeded up way did not become a supporting force of economic growth. In spite of higher inflation, countries with a lower speed of nominal convergence like Hungary, Poland or Slovakia reached high dynamics of economic growth.
  10. The Czech Republic meets the price stability criterion in the long term. According to a calculation for the end of 2004, the reference value for inflation rate was 3.1%, and the CR reached 2.6%. The CR met the fiscal stability criterion for the first time in 2004, the reference value being a limit of 3% of GDP prescribed by the Maastricht Treaty criteria. Similarly, criteria were met for government debt (below 60% of GDP) and convergence stability according to long-term interest rates. Reaching the rate of 4.5%, the CR is below the reference limit of 6.1%.
  11. Empirical data on the development of competitiveness proved progress in demand competitiveness (growing share of the CR in external markets), price competitiveness (favourable terms of trade) and qualitative competitiveness (lower unit values), in spite of the fact that the strengthening of the koruna and increase in unit labour costs acted against increasing competitiveness.
  12. Changes in the structure of the industry (CZ-NACE 10-41) in favour of activities with a higher potential of growth supported significantly economic growth. A slowed down increase in the share of services is the weak point of structural changes.
  13. Indicators of sustainable development indicate several types of discrepancies between economic and social developments that have been generated for a long time. From the point of view of future development, they can affect economic growth unfavourably. Among them are discrepancies between the development of (a) total insurance premiums and social benefits, (b) revenues and expenditures of the pension scheme, (c) GDP and household consumption, (d) labour productivity and real wages and salaries, and (e) GDP and domestic demand.
  14. Indicators measuring relations between economic and environmental developments bring positive and less positive signals. Progress was achieved in air pollution indications, which resulted in the decoupling of GDP development from the trend of individual emissions of pollutants. Energy intensiveness of production was on the decrease up to 1999 and stagnated in the following years due to a renewed growth of primary sources of energy. Energy intensiveness of production is still nearly twice as high as the EU15 average. An increasing negative impact on the environment is indicated by growing intensiveness of transport. In particular, growing goods transport by road is the source of increasing environmental burden. Emissions of greenhouse gases have in principal been stagnating since the second half of the 1990s. Compared internationally, the CR reports an above-the-average emission level of greenhouse gases.