Czech Growth

From Bloomberg Today:

Czech Ministry Raises '07 GDP Growth Forecast to 5.8% (Update1)

By Marketa Fiserova

July 24 (Bloomberg) -- The Czech Finance Ministry raised its 2007 economic growth forecast to 5.8 percent as households are projected to step up spending at the fastest pace in 11 years.

The forecast compares with a 5.3 percent prediction made three months ago, the Prague-based ministry said in its macroeconomic forecast posted on its Web site today. The economy should grow 5 percent next year, the ministry said.

The economy expanded a record 6.1 percent in each of the past two years and should maintain its robust pace as the fastest wage growth in three years and the lowest jobless rate in a decade encourage people to spend, the ministry said. The government aims to push through spending cuts and changes to the tax system during the time of accelerating growth to trim the budget deficit.

``The timing of reform steps in the area of public budgets, which will partially curb domestic-demand growth, can be considered extremely suitable from the perspective of the economy's position in the business cycle,'' the ministry said. In 2008, ``the reform will be reflected in lower government spending and in a shift from household consumption to investments.''

Consumer spending, which has become the engine of growth after exports, should surge 6.6 percent this year, the highest rate since 1996 and faster than a 5.4 percent prediction in the April forecast.

Rising Consumption

Higher wages and welfare benefits, continued credit growth and a rush of housing investment before a planned increase in a value-added tax rate will bolster consumption this year.

The government will try to win the parliament's final approval for a set of measures such as a flat income tax, an increase in the reduced VAT rate to 9 percent from 5 percent and cuts of some social benefits in a bid to trim the public-budget shortfall to 3.2 percent of GDP next year, 2.8 percent in 2009 and 2.5 percent in 2010, based on European Union methodology.

The budget shortfall will reach 3.9 percent of GDP this year, more than the 3 percent of GDP required for adopting the euro and 3.3 percent pledged to the EU, the ministry said in the forecast.

The ministry's report was published two days before the central bank revises its quarterly inflation and economic growth forecast that is seen to underscore the need to raise the lowest interest rates among EU countries for the second time this year.

The Finance Ministry raised its 2007 average inflation rate forecast to 2.3 percent from the 2.1 percent rate predicted three months ago.

Average Inflation

It expects an average inflation rate to climb to 3.4 percent next year, higher than the earlier 3.2 percent forecast. The central bank targets inflation at 3 percent, allowing it to hover between 2 percent and 4 percent.

Twenty of 22 economists surveyed expect monetary policy makers to lift the main interest rate to 3 percent on July 26 from 2.75 percent.

The unemployment rate is expected to drop to 5.8 percent this year before falling to 5.5 percent in 2008, the ministry said, adding that the structural problems on the labor market is hindering a larger reduction in the jobless rate.

``There are a shrinking number of people who are able and willing to work,'' the Finance Ministry said. ``The number of vacant jobs in the economy has reached record highs while entrepreneurs face problems hiring people for new production capacities.''

The current-account deficit should represent 2.1 percent of GDP this year and account for 1.5 percent of GDP in 2008, the ministry said. The koruna's average exchange rate in 2007 will be 28 against the euro and 27.4 per euro next year, the report said.

The koruna traded at a two-month high of 28.18 per euro as of 3:48 p.m. in Prague, compared with 28.20 yesterday.