The five key challenges confronting the next Czech Republic government

The next Czech government will inherit a relatively fast-growing consumer-driven economy, but also a host of difficult medium-term challenges. These include a persistent structural deficit in public finances, rising public expenditure needs, an economy that is struggling to move up the value chain, and a swelling shortfall in private investment since the pandemic.

What you will learn:

• The Czech Republic remains an attractive location in the Central and Eastern Europe context but the export-led manufacturing-oriented growth model is difficult to sustain in a more protectionist world. It will need to strengthen European integration and shift to higher value-added production.
  
• The Czech budget deficit is low by the EU standards at 2%, though it has rising expenditure needs in defence, infrastructure, energy and education. We estimate that meeting these would widen the deficit to 5.6% of GDP. The Czech debt-to-GDP ratio is among the lowest third of the EU at 43%, but pressures on public finance will rise.
  
• Meanwhile, potential growth is slowing. We estimate Czech potential output growth slowed across the key components to just above 2% from around 3% pre-pandemic. We doubt the next government will adopt a wide-reaching structural reform programme; instead, partial measures and kicking the can down the road is more likely.