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Government sees GDP fall this year.

1.6.1999 12:10

(Monika Procházková) Several government agencies (MF, ČNB, MLSA, CSO) have agreed upon the forecast of the economic development of the Czech Republic until 2002. This joint forecast should serve as the base for the construction of a more realistic government budget for 2000.

This year's budget approval was rather confusing. Due to the lack of coordination and due to rigidity on the side of the Ministry of Finance, the budget was based on unrealistic assumptions. Just a few days after the budget with expected deficit of CZK 31bn was passed, the Ministry had to update its forecast, and, after a few weeks, it finally admitted that the deficit was going to be much higher. The current expectation is CZK 47bn, however, the reality could be even higher.

The government tries to avoid the similar situation by more thorough discussion with the CNB at the Economic Council. This weekend the Council has produced a harmonized forecast of the GDP, inflation and unemployment for three coming years. The question is, though, how much these forecast will help in the fall, when he budget will be drafted. Problems that occurred this year were mainly caused by similarly "old" forecasts.

EC expects the revival of the GDP growth within the next year, when the GPD should grow by 1.5% (after this year's decline by 0.8%). Patria expect the next year's growth as well, however our forecast of the 2,5% GDP growth is more optimistic. In longer term we expect growth of around 4% to be based on higher household's consumption, reviving of investment activities (due to significantly lower interest rates and higher activities caused by an inflow of foreign investment).

EC's forecast of the unemployment is only slightly above Patria's expectations. An interesting fact is that the EC expect an increase of inflation by 6% in 2000 and its consequent decline to 5% on 2002. Our forecast is by less than a percentage point lower for the year 2001. There are no marked differences in forecasts of the unemployment. Patria and the EC expect further growth of the unemployment's level and its stabilization at around 12%. The EC's forecast of the average unemployment of 10.8% we consider too pessimistic, because by the end of this year there would have to be 15% unemployment.

We deem the EC, the government and the CNB discussions very reasonable. On the other hand, though, we would not welcome if that became the CNB's duty to discuss inflation targets. The CNB has already proposed its mid-term strategy where it envisages convergence of the Czech inflation to the level of the EU. To change the inflation strategy now would not be efficient and would not help the credibility of the Czech economy policy and it would also endanger the independent position of the CNB.

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