Boston, MA -- (SBWIRE) -- 07/28/2012 -- Core Views We expect weakened external demand to hit the Czech Republic's economic growth hard in 2012. The Czech economy remains highly dependent on exports and investments for economic growth, both of which have come under pressure since H211. Ongoing fiscal austerity and weak consumer spending will see to it that growth remains largely stagnant this year. Despite mounting pressure on the centre-right coalition government from opposition parties and ongoing ructions between the three governing parties, we believe the Czech Republic's fiscal position will remain sound, with a bias towards austerity. With international investors shying away from government debt that is not backed up by prudent fiscal and debt dynamics, we expect the government will be keen to keep its hard-earned fiscal credentials and low borrowing costs intact. We maintain our view that the Czech National Bank will keep interest rates on hold this year at 0.75%. While the weak economic outlook could arguably warrant a rate cut, the expectation that consumer price inflation is set to rise somewhat this year on the back of planned VAT hikes precludes such a move at this juncture. Major Forecast Changes Our real GDP growth forecast for the Czech Republic has been slashed to 0.1% in 2012, from 0.8% previously. This view has been bolstered by data released by the statistical office showing the country was in a technical recession at the end of 2011. Weakened external demand, combined with ongoing fiscal austerity and no real recovery in consumer spending, will result in stagnant growth this year. Precluding a more dour outlook is our expectation for the global recovery to take hold towards the tail-end of 2012. We have revised our forecast for the Czech Republic's current account deficit to 4.4% of GDP in 2012, from 4.7% previously. The same dynamics remain in play, with the widening income account deficit outstripping the merchandise trade surplus. However, soft domestic demand and a lower profit outlook for Czech subsidiaries of foreign companies will mean a lower overall deficit in 2012. Key Risks To Outlook A more pronounced slowdown in eurozone economic growth - in particular in Germany - would have a negative effect on the Czech Republic's economic growth trajectory. Owing to the high degree of trade integration with Germany, the Czech Republic's economic recovery remains highly dependent on external demand remaining elevated. Intensified political conflict within the three-party coalition and growing public dissatisfaction with the administration could work to undermine the fiscal austerity drive. In the event that oil prices remain at elevated levels or experience a significant increase through the course of 2012, a number of our forecasts for the Czech economy would very likely be put under review, including our forecasts for economic growth, the balance of payments position, consumer price inflation and interest rates.
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