The satisfactory level of macroeconomic stability reached in the former ~ s F R has been maintained and even improved in the Czech Republic during 1993. On the other hand, the recovery of economic growth which started in the second half of
1992 has been interrupted by the split of the ~ s F R and postponed to 1994.
Estimated impacts of major positive and negative factors on Czech GDP in the first half of 1993 are given in Table 1.5. The statistical data on GDP components reveals, that a moderate decline in GDP in the first half of 1993 has not arisen from the lack of demand. Aggregate demand increased by 14 billion Czech crown or CZK (in constant 1984 prices), or 4.6%. All components of domestic and foreign demand increased except exports to Slovakia. On the other hand, the increase in aggregate demand was fully satiated by an increase in imports, so there was no room left for GDP growth. Especially imports of investment goods increased very rapidly, which may support the future competitiveness of Czech industry.
As shown in Table 1.5, the continuing world recession was one of the negative factors influencing the downward trend in Czech GDP, by an estimated 2.1%.
The negative impact of the division of the CSFR was similar (-2.2%). Another negative factor was a too restrictive budget policy (creating unnecessary surplus) which might be responsible for a further 1.8% of the decline in GDP. On the other hand, continuing inflow of foreign capital, as well as an expansion of Czech exports (significantly supported by the relatively low exchange rate and low level of wages) were the major positive factors with 2.7% and 3.1% contributions respectively. A small negative decline in GDP (by 0.5%) was the difference between the positive and negative impacts.
A more careful look at the statistical data also reveals quarter-to-quarter growth in Czech GDP in 1993: by 3.1% in the second quarter and 4.8% in the third quarter.
Following this trend, fourth quarter growth will continue to be positive -so much so that when combined with second and third quarter growth they will compensate for the steep first quarter fall. Annual growth would thus attain the 0% predicted for the year in Table 1.6.
Table 1.6 also contains forecasts of other macroeconomic indicators for 1993.
Along with GDP, the most important ones are annual CPI or inflation (21%), unemployment rate (3.5%), and current account surplus including the account with Slovakia (2.1 % of GDP).
In addition, Table 1.6contains our forecasts of basic macroeconomic indicators of the Czech Republic for 1994 and 1995. GDP has been estimated to grow by
Table 1.5 Impacts of Major Factors on Czech GDP in the First Half of 1993 (bln. CZK, constant 1984 prices)
s s.
Data for the First Half Year Contributions of Factors to the Change b CD Inflow of Restrictive3
World Split of Foreign Expansion Budget Other Indicator U1992 U1993 Change Recession the ~SFR Capital of Exports Policy Factors2
Private consumption 98.0 101.5 3.5 -1.3 -4.8 2.8 3.3 -1.1 4.65
Government consump-s
tion 32.7 34.1 1.4 -0.4 1.4 0.9 1.1 -3.9 2.3s
CD Gross capital formation 50.1 57.6 7.5 -0.7 0.9 6.5 1.6 -0.6 -0.2 Aggregate domestic 0k?
demand 180.8 193.2 12.4 -2.4 -2.5 10.2 6.0 -5.6 6.72-
Exports excl. the SR' 96.2 107.3 11.1 -2.9 4.2 3.8 6.0 - - Exports to the SR' 30.0 20.5 -9.5 -1.1 -8.4 - - - -F
Aggregate demand 307.0 321.0 14.0 -6.4 -6.7 14.0 12.0 -5.6 6.72
u of which: 2. n Imports incl. the SR' 113.9 128.9 15.0 -2.4 -2.5 8.9 6.0 -2.1 7.1 Gross domestic product 193.1 192.1 -1 .O -4.0 -4.2 5.1 6.0 -3.5 -0.4 Im~acts on GDP in % 100% 99.5% -0.5% -2.1% -2.2% 2.7% 3.1% -1.8% -0.2%'
Exports and imports including services. Source: Czech Statistical Office and author's own calculations.18 I. s'ujan and M. Sujanovil
able
1.6 Macroeconomic Indicators of the Czech RepublicActual Forecast
Source: Czech Statistical Office and author's own calculations.
2.5% in 1994 and 4.2% in 1995 under the following assumptions (Novotny 1994, Sujan 1994):
the world recession will finish and recovery will start during the next two years;
the negative impact of the division of the
CSFR
will be successively exhausted;inflow of foreign capital will increase reflecting the remarkable macroeco- nomic stability in the Czech Republic, its convenient geographic position, low exchange rate, low wage costs, and skilled labor force;
expansion of Czech exports will continue taking advantages of the low ex- change rate, low wage costs, and support of foreign capital, including a growing share of machinery equipment imported from advanced countries; and,
Macroeconomic Development in the Czech Republic 19 macroeconomic policy (including fiscal, monetary, and wage policy) will be slightly expansionary.
From among forecasts of other important macroeconomic indicators, the annual inflation as measured by the CPI is expected to fall to about 9.2% in 1994 and 6.5%
in 1995. This forecast comprises 'core inflation' of about 5 4 % and the impact of some additional abolishment of remaining price controls (3% in 1994 and 1%
in 1995). The unemployment rate is expected to increase to about 5% and 5.5%
respectively, at the end of 1994 and 1995. An increase in unemployment despite the GDP growth reflects expected speeding-up in the industrial restructuring of the Czech economy.
It may be expected that the expansion of exports will nearly offset growing imports which are necessary for restructuring and creating higher competitiveness of Czech industry. Under the assumption of the slightly negative trade balance and continuing highly positive balance of services, the current account is expected to remain in surplus of about 1 5 2 % of GDP until 1995.
1.8 Conclusions
Before the 1989 revolution, the macroeconomic performance of former Czechoslo- vakia was disappointing. The country was loosing its pre-war position among the advanced industrialized countries. The past decade saw no real growth in GDP and personal consumption. The inflexible industrial structure considerably prevented further economic progress.
The radical economic reform was prepared in 1990 and started January 1, 1991. The implementation of the reform was successful from the point of view of macroeconomic stability (relatively low inflation, stable exchange rate, current account surplus and nearly a balanced state budget). However, it was accompanied by a sharp decline in real GDP, which was further worsened by the collapse of the former Council for Mutual Economic Assistance.
Another shock came from the split of the Czechoslovakian Federation, which affected negatively the expected economic recovery in both successor republics.
As expected, the Slovakian Republic has suffered much more.
According to the international comparison, the Czech Republic is now in the best macroeconomic position from among all the post-communist countries.
Recent macroeconomic trends and short-term forecasts are promising. However, some important reform steps have yet to be completed (privatization, restructuring and initiating economic growth). Czech macroeconomic policy should be cautious
20 I. Sujan and M. Sujanovti since any expansion under imperfect market conditions may cause higher inflation, current account deficit, and other undesirable developments.
Notes
[ l ] These impacts have been estimated based on our method. Similar estimates have been published in some other studies (Bleaney 1993, VintrovA 1992).
[2] GDP converted into USD using purchasing power parities. Source: Statistical Bulletin of the Czech Republic, Slovakia, Hungary and Poland, No. 311993,
CSU
Prague 1993, and authors' own calculations.References
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