FinMin: GDP to grow 2.7 percent in 2012, unemployment to drop

The Czech Ministry of Finance on Monday estimated that gross domestic product (GDP) would grow by 2.2 percent in 2011 and 2.7 percent in 2012. Previously the ministry predicted 2.0 percent growth for 2011. The ministry also said that the employment situation was improving.

GDP growth for 2010 was 2.5 percent, which was a better performance than the 2.2 percent it had predicted. The main contributing factor to its 2010 growth probably came from gross capital formation related to replenishing inventories and, to a lesser degree, household consumption, the ministry said.

The Czech Republic’s economic output is still recovering from the global financial crisis, the ministry said. This is not unlike the situation in other countries. “World economic recovery remains encumbered with many uncertainties. The main sources of risk are connected with the state of public budgets and the situation in the banking sector in some eurozone countries,” the ministry said in its forecast.

Consumer prices, consumption to rise

For the future, inflation is a concern. “We expect growth in domestic consumer prices for 2011 and 2012 in the upper half of the ČNB (Czech National Bank) inflation target tolerance band, i.e. moderately above 2 percent,” the ministry said. Household consumption increased 1 percent in 2010 and is pegged to rise another 1 percent in 2011 and 2.9 percent in 2012. It fell 0.2 percent in 2009.

But the employment situation is improving. “Although consequences of the recession are still seen on the labor market, the situation should gradually improve here as well. After two years of decline, employment should increase by 0.3 percent in 2011 and by 0.6 percent in 2012. The unemployment rate apparently peaked in 2010, and it should moderately decrease in this year and next,” the ministry said.

Wage bill rising as unemployment drops

Unemployment was at 7.3 percent in 2010, according to the ministry’s figures based on labor force survey (LFS) methodology, and is expected to fall to 7.2 percent in 2011 and 6.8 percent in 2012.

“Growth in the wage bill compared to 2010 should increase to 3.1 percent in this year and 4.7 percent in the next due to the rise in employment and in average wages in the private sector.

The current account deficit as a proportion of GDP should remain at a sustainable level, according to the ministry’s predictions. “The government sector deficit in 2010 reached 4.8 percent of GDP, according to the Ministry of Finance’s preliminary estimate.

From the viewpoint of the expected development for government sector outcomes in 2011, the new macroeconomic outlook is neutral and the forecast of 4.6 percent  of GDP does not change,” the ministry said, adding that more information on the government deficit would be available in April.

The forecast is based on long-term interest rates rising to 3.9 percent in 2011 from its current 3.8 percent, and the Czech crown/euro exchange rate dropping to 24.2 from 25.3 in 2010. It also assumes that Brent crude oil will rise to to an average of $88 per barrel in 2011 from $80 in 2010.