Coalition talks in the Czech Republic will determine the post-election outlook
The winner of the Czech parliamentary election in October is all but certain to be the populist ANO, which has been a long way ahead in the polls for almost two years. But the shape of the new government is still uncertain – our baseline is for ANO to form a coalition with one of the centre-right parties in the current government, which will temper its fiscal profligacy.
A downside scenario is an ANO government with fringe parties. We think this would trigger an adverse market reaction on fears of fiscal profligacy, higher inflation, and an erosion of institutional quality. GDP could be 1.5% lower by the end of the coalition’s term, with debt-to-GDP up 3ppts and 10-year yields rising to 5.2%.
In an upside scenario, ANO and its centre-right parties implement a limited labour market reform and increasing infrastructure investment. This would boost GDP by 0.5% by 2029 via higher productivity and labour market participation. But we view this as an unlikely scenario.
A wider risk in all electoral scenarios is that the new government squanders the time afforded by the positive macro backdrop to tackle much-needed structural reforms in the labour market, energy infrastructure, healthcare, and the tax system.
