Executive Search in Czech Republic – 2019 Outlook
Czech Economy Starts to Slow Down
The Czech economy is driven mainly by private consumption that is expected to slow to 3.0% in 2019.
The growth is expected to continue declining in 2019 and 2020. The forecast for 2019 is 2.9%. Currently, the main negative risk for Czech economic growth is considered to be Brexit (which is a major importer of Czech-made cars) as well as the general impact on wider United Kingdom-EU relations caused by Brexit, especially in the area of free movement of goods and services. Czechia is very dependent on the Automotive Industry.
For 2019 the growth should mainly be driven by investment, which is to be stimulated by EU financial support from the European Structural and Investment Funds. We also need the private sector to innovate its technological equipment and by decreasing cost of capital relative to the cost of labour at low real interest rates.
Investment growth is set to slow down after peaking in 2018. Both the private and the public sector will continue to support investment activity, in particular in housing and manufacturing. Capital expenditure is expected to increase further, according to the finance ministry plans, which call for investment allocation to rise by 36% in the 2019 budget.
Low productivity growth, together with strong wage increases driven by the labour shortages, has resulted in rising costs that businesses are partially transferring to consumers. According to the finance ministry, the forecast for average inflation is 2.2% in 2018 and 2.3% in 2019, above the target of the Czech National Bank (CNB).
Price dynamics are expected to accelerate at the turn of 2018-2019, due to a rise in energy prices (gas and electricity) and a low comparison base in early 2018. A poor harvest in 2018 may also increase food prices in 2019.
Moderation in investment growth is expected to lead to a slight drop in import growth due to relatively high import-oriented Czech investment. Imports are currently growing faster than exports, reflecting import-intensive investment and household demand for imported goods. Exports, although tending to increase, will be hindered by limits of production capacity, particularly in the automotive industry. The competitiveness of Czech exports could be affected by increasing real unit labour cost, which has grown strongly to around 5% in 2018 and will slow down to about 2.5% in 2019 and 1% in 2020.
Consumer consumption strong
Household consumption remains strong, slowing down to 3.8%, supported by income and employment growth and lower saving.
In 2019, the CNB is expected to continue a gradual tightening of its monetary policy. Given the anticipated development of inflation and monetary policy of the CNB and the ECB, long-term interest rates are projected to rise throughout 2019 and 2020.
In 2019, they may reach 2.6%. Higher domestic interest rates will reduce strong housing demand and household credit. Consumer loans will continue to draw their strength from the power play of the labour force on the labour market.
In 2019, Czech currency could strengthen to CZK24.9/€ because of the ongoing real convergence, expected developments of labour productivity and the positive interest rate differential between the Czech Republic and Eurozone.
The 2019 general government budget represents a less cautious plan, including very strong expenditure growth, with a large increase of mandatory spending. The government plans to prop up investment spending but does not plan to introduce any new measures. The official budget lacks the buffers of previous budgets.
In 2019, the ministry estimates surplus at 1.0% of GDP, reflecting the fulfilment of the government’s priorities in the social area, as well as in the investment expenditures of both physical and human capital. In 2020-21, the budget surplus is expected to remain broadly steady at around 0.8% of GDP. The structural balance should be positive in all years of the outlook. Given the surpluses and nominal GDP growth, general government debt should continue to decrease and reach 30% of GDP in 2021.
While revenues are expected to grow in line with the economy (by 5.2%, driven primarily by personal income tax – 12.4% – and social security contributions – 7.4% – as a result of the high wage growth), expenditures are expected to increase significantly.
Czech average gross monthly nominal wage currently amounts to CZK31,516 (€1,217). Effective January 1, 2019, the minimum wage will be increased by CZK1,150 (€44.5) to CZK13,350 (€513).
Czechia is the wealthiest nation among other Central and Eastern Countries (CEE), according to the Allianz Global Wealth Report 2018 comparing 53 countries. In the regional rankings, Czechia occupied the middle of the chart at position 26. The net wealth was €15,290 per capita in 2017, up from €12,360 in 2016.
Slovakia still climbing
The wealth of neighbouring Slovakia was half that of Czechia in per capita terms, or around €6,100. But whereas Czechia has already passed its economic peak and is beginning to slow, Slovakia is still in the upswing and should be growing at 4.5% in 2019. In a long-term perspective, Slovakia is growing faster than Czechia and its wealth will catch up.
The situation in the automotive industry has become complicated due to Brexit, which could endanger car demand and Czech GDP. Adoption of new environmental regulations could temporarily hinder production too, having an adverse effect on the whole supply chain. The outlook for the automotive industry remains uncertain due to a slowing of the European countries´ economic growth and a high degree of market saturation.
The biggest issue in the construction sector is a lack of demand for housing and exhausted capacity, which are the main drivers of strong demand in the private sector. The double-digit growth of 11.1% that is expected in 2018 will not be repeated in 2019. The mix of these two factors has been pushing up construction prices, which is likely to continue in 2019. The figure is expected to reach 4.7% in 2019.
The Czech Republic will most probably be compliant this year with all the Maastricht convergence criteria, except for the exchange rate where it does not participate in the relevant mechanism. Nonetheless, the Ministry of Finance and the CNB recommended that government does not set a target date for adopting the euro in 2019, which the government has accepted.
In terms of Digital Service Taxation, the Czech Republic recognizes the need to flexibly react to the changing business environment in the context of digitalization and in 2019 onward it will support a common (short-term) approach within the EU.
In order to increase the transparency and effectiveness of investment incentives, the Investment Incentives Act is to come into force in 2019. The new system will favour projects involving technology centres and business support services centres.
The political situation remains shaky due to the unstable position of Prime Minister Andrej Babis (ANO) who faced the risk of his coalition breaking up several times in 2018. In December 2018, the European Parliament suspended EU subsidies to the Agrofert conglomerate, a business founded by Babis, in a non-binding resolution. In January and February 2019, the European Commission will audit the funds received by the company.
Babis also survived a no-confidence vote in November due to a crisis following the revelation that the prime minister’s son Andrej Babis junior claimed his father kidnapped him and held him captive in the Crimea to prevent him from testifying in the Stork´s Nest corruption case.
Migration in Czechia
The Czech Republic remains an important country of immigration, although the immigration flows fell sharply in the context of the economic crisis. The main purposes of immigration are family reunification, employment and education. According to official statistics, the total number of immigrants holding a residence permit slightly increased to about 434,000, which represented around 4% of the total population. The major immigrant communities are Ukrainian, Slovak, Vietnamese and Russian.
Important dates/events in 2019
In 2019, the Czech Republic will celebrate 30-year anniversary of the Velvet Revolution and 15-year anniversary of its accession to the EU.
In the Global Competitiveness Index compiled by the World Bank for 2018 the Czech Republic was ranked 29th, the same as in 2017. Slovakia dropped two places to 41.
The Index of Economic Freedom survey ranked the Czech Republic in 24th place among 186 countries after it gained 74.2 points. Czechia is ranked 13th among 44 countries in the Europe region.
Czechia is the 7th most peaceful country in the world as ranked by the Institute for Economics and Peace (IEP) 2018
Unfortunately, Czechia is the least healthy country in the world, according to new research. This was conducted by Clinic Compare based on data from the World Health Organisation by analyzing alcoholic consumption, tobacco consumption and the prevalence of obesity in 179 countries around the world.
Recruiting challenges in Czechia
Challenges facing anyone seeking to hire for executive positions revolve around the issue of availability which is depressed by a very low employment rate. You’re not getting the applicant quality you need to make a hire, and your sourced candidates aren’t responding.
Instead of responding with more effective and aggressive hiring processes, many companies exacerbate the problem with manual and tedious tasks slowing down the process and increasing the time to hire. Candidates are very often dropping out of the recruitment process because it takes too long and, in a tight market, they’re quickly accepting offers elsewhere.