With headlines of doom for the EU and even Czech Republic being thrown around like airport baggage is there sound reason for concern about the Czech economy in 2012 and beyond?

I am far from an economist but consider myself fairly pragmatic. Here are a few things I found about the Czech economy that you may find interesting.

Doom and gloom in the headlines

First of all, I should outline some of the articles which I am speaking about so you can get a sense of the ‘doom and gloom’. They are headlines such as Double dip recession threat looms over Czech Republic or Czech economy has good reasons to fear Greek default.

There are also constant downgrades of the forecast GDP growth for 2012 including one predicted to be released by the Czech finance ministry on Monday, October 31st. The general consensus now is that GDP growth might hover around 1% similar to what is now predicted for Germany, Czech Republic’s biggest trade partner.

I am not denying that a double-dip recession could hit Czech Republic or that the collapse of the EURO zone would have a huge consequence for the country but often the fundamentals can be lost in the media-generated scare.

Czech debt to GDP

The fact is, Czech Republic sits in a very enviable position, economy-wise. Why can I say this?

One thing is the very low gross debt that the government holds as opposed to GDP. In 2010 this was around 38%, below all the neighboring countries and much, much better than the EU-27 average of 80%.

Czech Debt to GDP Ratio Best in Region

Germany, as Czech Republic’s biggest importer by far, is also very healthy fiscally and although their debt is slightly higher than the EU-27 average at 83%, has a very strong manufacturing sector, fantastic infrastructure and, in general, seem to have their heads screwed on right when it comes to running the finances in their country.

If you were going to go into business with a partner, which other EU country would you rather chose than Germany? I can’t think of a better one.

Why does debt to GDP make a difference?

Well, excess debt like we see in many developed countries forces them over the long-term to take steps which slow down the economy such as higher taxation and less government spending.

IMD Prof. Stephane Garelli, Director of IMD’s World Competitiveness Center said regarding this: “Government spending has reached new highs since the recession: on average 47% of the GDPs in the most advanced economies. 12 European countries are already above the 50% threshold. The 23 biggest spenders are all European governments. How long can it last? In a new world of ‘state capitalism’, government efficiency will become a key determinant to competitiveness. Alas, the time lag between government reforms and economic imperatives keeps on increasing.”

Governments are spending desperately to try to stimulate their economies as well as propping up banks and key industries. There is a finish line for each one of them with regard to how much debt they can handle as opposed to when it will start to seriously hamper long-term growth.

In this regard it’s as if Czech Republic got a head start.

There is still head room where other countries are at the point where they can’t move.

IMD estimated the time it would take for the higher indebted countries to pay down their existing debt to a point where it was sustainable (calculated at 60% of GDP). The numbers are appalling. Here are some examples: Japan in 2084, Italy in 2060, Portugal in 2037, U.S. in 2033, etc.

Will this affect these countries’ ability to grow in comparison with countries with low debt loads like the Czech Republic? Absolutely.

Czech inflation

Czech Republic's Inflation Best in Region

Czech Republic has had very muted inflation compared to the EU as a whole.

Different than in the case of many countries with high debt loads, using inflation to reduce government debt should never have to be considered by Czech Republic.

Lower inflation means that the buying power of consumers and business will not deteriorate, further stimulating the economy.

It also means that the Central Bank will have wiggle room with regard to interest rates, allowing them to effectively control the CZK’s exchange rate, such a key factor for the export-driven economy.

Czech unemployment

Czech Republic Unemployment Among Best in Region

Czech Republic’s unemployment seemed to reach it’s scariest point in December of 2010 but has since improved.

The prospects look good also with the IMF, for example, predicting Czech Republic’s unemployment to continue to be reduced through 2015.

Low unemployment means stronger consumer spending, better tax revenue for the government and a number of benefits to society socially as well.

Conclusion

In today’s economic instability it is really hard to know what will happen from day to day, let alone a year or two in advance.

Really though, any economic news we receive has to be considered in context. Are surrounding countries faring better? Will surrounding countries be affected less than Czech Republic to a new crisis? What are the long-term prospects?

If I was a betting man, I would say that the odds are stacked in Czech Republic’s favor to outperform

Nathan Brown www.czechpoint101.com