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Czech Finance Ministry increases 2007 growth forecast to 5%

The Czech Finance Ministry raised its forecast for economic growth this year to 5% as it expects household spending to accelerate.

The GDP prediction compares with 4.9% in the previous outlook issued in October, the ministry said in its quarterly economic report posted on its Web site today. The economy probably expanded 4.9% last year and will grow 5% in 2008 and 5.1% in 2009, the ministry said. The economy, which advanced a record 6.1% in 2005, is losing momentum as new export-oriented car plants reach full capacity, slowing exports, while rising domestic demand pulls in imports. The forecast matches the expectation used in this year's state budget. „We expect a gradual closure of the positive output gap and a return to a potential product, which is connected with a moderate slowdown in GDP growth,” the ministry said. „Uncertainties about the future development are multiplied by lacking knowledge in the area of the fiscal and structural policies.” The ministry also came up with the first estimate of last year's public-budget deficit at 3.5% of GDP.

The figure, calculated according to the Eurostat methodology, slightly narrowed from a 2005 shortfall of 3.6%. The debt last year probably represented 30.6% of GDP, compared with 30.4% in 2005, the ministry said in the forecast. The forecast for the average inflation rate this year was reduced to 2.4% from 3% predicted three months ago, the ministry said. The ministry counts on an average koruna exchange rate against the euro at 27.70 compared with 28% in the October outlook, and a „moderate increase” in the central bank's interest rates in the H2. The structure of growth is changing, the ministry said, with domestic consumption expected to grow 4.5% this year, compared with a 4.2% outlook from October. Net exports are expected to add 0.8%age points to GDP in 2007, more than half a point in the last forecast. The unemployment rate is expected to reach 6.7% this year, unchanged from the earlier forecast, while the current account deficit should represent 3.5% of GDP this year, compared with 2.4% seen before, the report showed. The ministry's outlook is less optimistic than the central bank, which last week said the economy will advance 4.4% to 6.2% this year and 3.1-6.5% in 2008. The inflation rate should be 2.4% to 3.8% in December before jumping to 2.8-4.2% in June 2008, the central bank said. (Bloomberg)