Czech September 2007 Trade Surplus

The Czech Republic posted its first trade surplus in three months in September as import growth slowed and exporters stepped up sales after production was reduced during the holiday period.

According to preliminary data from the Czech Statistics Office for September 2007, exports and imports at current prices grew by 11.0% and 7.6% year-on-year respectively. The trade balance achieved a surplus of CZK 14.4 billion, which was an improvement of CZK 7.0 billion year-on-year. This figure was fuelled by a CZK 5.8 billion increase in the trade surplus in machinery and transport equipment and by a CZK 1.9 billion decrease in the trade deficit in mineral fuels, lubricants and related materials.

The surplus was 14.4 billion koruna ($771 million), which compared with a deficit of 600 million koruna in Augustr and a 7.4 billion-koruna surplus a year earlier.




Exports grew at the slowest pace since August 2006, and imports at the slowest pace since April 2006. These figures are influenced by the high base figure of September 2006 when the third highest level for 2006 was recorded. Due to appreciation of the koruna against the euro and in particular against the US dollar, external trade grew faster in euros (exports +14.3%, imports +10.8%) and in US dollars (exports +24.6%, imports +20.8%) than in korunas.



In terms of destination and origin countries, the trade surplus with EU27 states rose by CZK 66.9 billion and trade deficit with non-EU27 states increased by CZK 28.2 billion. The surplus with Slovakia increased (by CZK 22.1 billion), as it did with Germany (by CZK 13.7 billion), the United Kingdom (by CZK 11.3 billion), Poland (by CZK 7.7 billion) and France (by CZK 7.4 billion).

The deficit in trade with the Russian Federation decreased (by CZK 27.0 billion), and the trade balance with Norway improved (by CZK 9.6 billion) turning the deficit into a surplus. The trade deficit with China increased (by CZK 49.5 billion), as it did with the Netherlands (by CZK 10.4 billion), Japan (by CZK 7.1 billion) and Ireland (by CZK 4.6 billion).

The trade balance reached a surplus of CZK 14.4 billion, which was an improvement of CZK 7.0 billion when compared with September 2006. This is the highest September surplus in the history of the Czech Republic and the second highest surplus during 2007.

Czech export-oriented plants often boost production in September following shutdowns during the holiday period and before Christmas imports. The impact of surging oil prices has also been reduced by the koruna's gain against the dollar, thus keeping open the possibility that the full-year surplus will beat the record 43 billion koruna from last year.

Czech Producer Price Index September 2007

In September 2007, according to data from the Czech Statistical Office, and as compared with August 2007, prices of agricultural and industrial producers, construction work and market services grew by 4.3%, 0.1%, 0.5% and 0.9%, respectively.

In comparison to September 2006, prices of agricultural and industrial producers, construction work and market services were higher by 18.1%, 4.0%, 3.8% and 1.6%, respectively.

Agricultural producer prices grew by 4.3% in total. Prices of crop products grew by 5.9%, higher were prices of fruit (+25.1%), cereals (+10.5%) and oil seeds (+9.0%). Prices of potatoes and vegetables fell by 24.6% and 3.3%, respectively. Prices of animal products increased by 2.6% due to higher prices of eggs (+14.7%), poultry (+3.8%), milk (+2.8%) and pigs for slaughter (+1.2%).

Prices of industrial producers increased by 0.1% in September 2007 (-0.1% in August). The most significant increase of prices was recorded in ‘coke, refined petroleum products’ up 2.9% (-3.8% in August). The prices of ‘food products, beverages and tobacco’ were up by 0.7% (+1.2% in August). Prices went down in ‘chemicals, chemical products and man-made fibres’ by 1.0% and in ‘basic metals, fabricated metal products’ by 0.4%.

Construction work prices grew by 0.5%, construction material input prices fell by 0.6%.

Prices of market services in the business sphere grew by 0.9% due to 1.6% price increase in ‘real estate, renting and business services’ (prices of advertising services were up by 11.1%).

The prices charged by industrial producers were up by 4.0% in September 2007 (+3.7% in August). This increase was particularly influenced by higher prices for ‘electrical energy, gas, steam and water” (+7.5%). In addition, the price level for ‘basic metals, fabricated metal products’ was up significantly - by 5.7% (+6.9% in August). Prices for ‘food products, beverages and tobacco’ went up by 4.4% (+4.0% in August). Construction work prices were higher by 3.8% (+3.6% in August), construction material input prices grew by 5.3% (+5.9% in August)

Prices of market services in the business sphere were higher by 1.6% in total (+1.0% in August). Prices of ‘real estate, renting and business services’ (higher prices of advertising services by 6.0%) and ‘freight transport and storage services’ grew by 2.5% and 3.3%, respectively.

Obviously the increase in industrial producer prices is to some extent conditioed by energy prices, but the steady upward movement since the start of the year is unmistakeable.

Retail Sales August 2007

In August, according to data from the Czech Statistical Office, seasonally adjusted sales in ‘retail trade except of motor vehicles and motorcycles’ increased by 0.3% month-on-month at constant prices. The year-on-year increase was 7.2%, not seasonally adjusted sales 6.9%. The growth of sales of food, beverages and tobacco accelerated to 5.4%, non-food goods on the contrary recorded this year’s lowest increase of 7.9%. Seasonally adjusted sales in hotels and restaurants increased by 0.7% month-on-month in August, not seasonally adjusted sales increased by 1.8% year-on-year.





Seasonally adjusted sales in retail trade (CZ-NACE 52) increased by 0.3% month-on-month at constant prices in August, of which non-food goods by 0.5% while prices of food, beverages and tobacco stagnated. The growth of the trend component by 0.5% followed up on the trend from the previous four months and was 0.1 p.p. lower compared to the average of the last 12 months.


Year-on-year, after seasonal and working day adjustments (August 2007 and 2006 had the same number of working days), sales in retail trade increased by 7.2% at constant prices. Not seasonally adjusted sales grew by 6.9% which was the third lowest growth from the beginning of the year owing most to the sale of non-food goods that this year recorded the smallest increase (7.9%) in August. Conversely, food, beverages and tobacco recorded the second highest growth (5.4%).

Almost 30% contribution to the total growth had non-specialised stores with food, beverages and tobacco predominating and a 23% contribution had specialised stores with other non-food goods. The fastest sale growth occurred in, in terms of share little significant, retail sale via Internet or mail order houses (16.6%). A two digit growth was recorded also in stores with textiles, clothing and footwear and right below 10% ranged the year-on-year sale growth in stores with pharmaceutical and medical goods, cosmetic and toilet articles. (Table 3)

Broken down by size group of enterprises, the biggest growth of sales occurred in enterprises with 50 to 99 employees (+11.1%). Enterprises with 100+ employees reported a growth by 7.9%, with 0 to 19 employees by 5.9% and with 20 to 49 employees by 5.0%.

Catch Up Growth and Demographics - Evidence from Eastern Europe

by Claus Vistesen: Copenhagen


Performing a simple series of adept Googling exercises around various sources on the internet you can easily discover that certain species of the lynx are able to travel at speeds of up to 50 kph (31 mph). Wikipedia informs us that the Eurasian lynx, on average, commands a hunting area of between 20-60 square kilometers in which the lynx is able to walk and run about 20 kilometers in one single night. All in all, a pretty rugged and constitutional little thing this lynx.

In this way, and perhaps because, at that particular point in time, the Eastern European Economies looked as if nothing could come in their way of economic prosperity and growth they were paired, by the Economist, with the region's sturdy feline coining the notion of 'Lynx Economies.' Thus, 'that particular point in time' was sometime back in the spring of 2006 where the Economist's (and my own) coverage of the CEE and Baltic economies came in hot on the heels of publications by the World Bank and and the Vienna Institute of Comparative Economic Studies speaking favorably of the future prospects of economic prosperity and thus 'catch-up' growth in the CEE and Baltic Economics.

Yet, merely 1 year and a tad later things seem to have changed quite significantly with respect to the discourse on the economic situation in Eastern Europe. Many of the contributors to this blog has been pitching on the change in discourse but also some of major institutional actors have been flagging the red banner. Not least the World Bank seems to have changed their attitude somewhat with most notably a recent report on the demographics of Eastern Europe entitled From Red to Gray - The Third Transition of Ageing Populations in Eastern Europe and the former Soviet Union as well as a recent writ with specific focus on the macroeconomic risks prevailing in the region. Yet, also the IMF in their latest World Economic Outlook devotes a chapter to the managing of large capital inflows where Eastern European economies also take center stage of the general tone of warning; in essence this note of warning concerning Eastern Europe seems to be the general talk of the day amongst economic analysts and journalists. As such, perhaps even the lynxes roaming the forests and planes of Eastern Europe are beginning to feel that the otherwise catchy notion conjured by journalists at the Economist is becoming something of a stretch according to the reality of the situation. Sure, things are moving fast now but it is what happens next which might finally serve to make the allegory rather unrealistic. In this entry I set out to explicitly investigate an issue which in fact has been treated several times on this blog and perhaps most often in the context of the CEE and Baltic Economies. Simply put and in the form of one simple question;

• How do changing demographics and more specifically the final and ongoing stages of the demographic transition affect the notion and principle of economic catch up growth and thus economic convergence as it is stipulated by (neo-classical) economic growth theory?

As I have hinted above in the introduction my main subject of analysis on which the general theoretical argument is based is the current and ongoing situation in the CEE and Baltic economies. A lot has been written about this recently not least from the hands of the contributors to this blog (see also above). As a one-stop overview of the concrete issues at hand this recent note by Edward over at Global.Economy.Matters should provide you with suitable ammunition to get you started. In particular, the following three point overview of the current economic situation in Eastern Europe should always be in the back of your mind as we move forward from this point ...

Basically the principal outstanding issues confronting the EU10 countries are threefold:

• Labour capacity constraints (which are normally a by product of long-term low fertility and large scale recent migration flows) are producing significant wage inflation and strong overheating.

• A structural dependence on external financing - which is in part a by-product of the effect of low levels of internal saving, and which is another factor which separates the EU 10 from those like India or China who are benefiting from a typical demographic dividend driven catch up, is leading to large current account deficits, and potentially high levels of financial instability.

• A loss of control over domestic monetary policy due to eurozone convergence processes which - with or without the presence of formal pegs - make gradual downward adjustment in currency values as a alternative to strong wage deflation virtually impossible. This issue is compounded by the likely private "balance sheet consequences" of any sustained downward movement in the domestic currency given the widespread use of mortgages which are not denominated in the local currency.

Traditionally a rigorous economic analysis in the light of the immediate events would focus a lot on point 2 and 3 but in this note we shall look specifically at number 1 and the issues of labour capacity, its constraints, and what it means of the economic growth of less to medium developed countries. Now, the most obvious caveat in this entry is that I really don't have the time at this point to really lay out the whole theoretical framework of economic growth theory and as such the precise slot in which my argument should be inserted within the wider theoretical framework. This will be the topic of a more rigorous article not suited for the blog format. However, I still need to attach some comments to set the scene where I should also immediately note that my previous note here at DM about catch up growth in Eastern Europe serves as a good state of the game post for what comes next.

Apart from my studies of selected pieces of the economic growth literature one of the best overviews of the concept of economic convergence as a function of the theoretical and practical assumptions vested in the growth models is to be found in an article by Norbert Fiess and Marco Fugazza on economic integration in Europe (PDF). As such it is important to note that convergence of GDP per capita levels is not a holy grail within the fields of economic growth theory. Rather, the process of convergence should be seen as an inbuilt consequence of the fact that as economies mature returns to production inputs decrease; that is to say that this discussion essentially revolves around the concept of increasing v. decreasing returns to scale in our economic model. If we think about decreasing returns to scale and introduce the concept of marginal productivity to production inputs we can then see that less developed countries are likely to exhibit higher rates of growth than their more mature counterparts in the sense that their marginal productivity is higher which then leads to a process of convergence. Now, this argument in its most strict sense is usually applied in the context of capital as a production input and coupled with the properties of an open economy and subsequent free flow of production factors this would lead to a rather rapid process of convergence or absolute convergence as the technical term. As regards to labour as a production input is has also been argued that the universal transition from an agricultural to manufacturing over to service (?) based economy produces a mechanism of convergence in the sense that this process implies a move up the value chain and thus that every unit of labour becomes more productive. Of course and even though we are talking about stylised facts here, this is also where the whole debacle begins in the context of my immediate argument because how certain is this process? Also, we need to take into account the distinction between stocks and flows (of labour) which is a crucial issue to consider when talking about ageing economies.

However and it does not take much of an economist to see that empirical facts do not support the idea of absolute convergence or at least it seems as if the process takes much longer to materialize than predicted by the theory. This has lead, among other factors, to a 'new' strand of economic growth models which allows for persistent growth divergence to exist between countries. The crucial aspect to understand here is the mechanism through which persistent divergences can occur. In this way, one of the widest contributions by economist to this thesis has dealt with the possibility that technological processes and thus accumulation of technological advances exhibits increasing returns to scale. The fundamental brilliancy of this notion is that it allows for a model where there is indeed decreasing returns to labour and capital but where different levels of technological effort leads to internal positive feedback mechanisms and thus explains persistent divergences in growth and 'prosperity' across countries.

Ok, I think that I have already said enough at this point and in order to get us back to track one crucial assumption and conceptual idea needs to be pinned down. As such and if we look at the rudimentary description of the economic growth process above it is not wholly unreasonable to argue that the growth process of an economy is somewhat directly related to the process of the demographic transition. Or as Robert Lucas puts it in a widely cited article ...

That is, the industrial revolution is invariably associated with the reduction in fertility known as the demographic transition.

As such, why don't we take a look at Eastern Europe where the economies have experienced, quite as expected by the conventional theory of economic growth, economic dynamics tantamount to catch-up or convergence. Especially the economic data since the expansion from EU15 to EU25/27 and, for some countries, the subsequent anchoring to the Euro has been very impressive indeed. Yet as Edward and I have been at pains (see link above) to explain again and again these countries are not your average emerging markets. This follows from the fact that their demographic structures have been fundamentally distorted due to a collapse of fertility in the beginning of the 1990s which has been aggravated by a persistent net outflow of migrants serving to further speed up the decline in the working and essentially also most productive cohorts. In order to capture this development and in order to frame the current situation the following point I made in a previous note is worthwhile to repeat.

In short, we are dealing with countries where the demographic transition by far, and indeed worryingly, has out paced the traditional economic process of economic convergence.

This is exactly what we are talking about here and apart from going to the heart of the imminent issues in Eastern Europe it also strikes right smack into the concept of economic growth theory and how to deal with the fact that the demographic transition does not occur the way it was originally anticipated. Most emphatically, we can see in the context of the Eastern European countries that the final stages of the transition have arrived far before and quicker than the twists and turns of history allowed for these economies to really get on with business. Yet, the general argument can just as easily be expanded into a discussion of the ageing part of OECD where it is painfully clear at this point that conventional economic theories are wholly incapable of explaining what is likely to happen next. In fact, we could stretch it so far as to say that modern economic growth theory is not able to explain what happens when fertility drops to a level below replacement level and stays there!

In Summary

Even though that a lot words have been written in this entry I am afraid that only superficial contributions have been made to the final answer of the proposed question. This entry principally had one main task, namely to initiate a line of reasoning which ultimately and hopefully can lead to a better understanding of modern economic growth processes in a context of the current demographic profile of many developed and developing economies. Specifically, this entry revolved around the concept of catch-up growth/convergence where the countries in Eastern Europe were suggested as an example to demonstrate how demographics can fundamentally alter the principles by which the economic growth process is likely to conform. In this way, the message is not that modern economic growth theory and growth accounting methods are rendered obsolete in the face of changing demographics but rather that considerable adjustment needs to be made; especially in the context of catch up growth/convergence but also crucially in the context of the notion of a steady state of economic growth. Returning briefly to the real world before we sign off it could seem as if the branding of the lynx economies never was more than a quick and essentially expensive make-up which is set to quickly wear off as we venture on. Specifically, recent signs coming out of the ECB and the European commission suggest that expectations are aligning towards an outlook where the process of convergence effectively risks grinding to a halt. My advice would then be not to exchange the carrot too swiftly into a stick since this would only serve to kick those who are already on the ground.

EU Ministers Criticise Czech Government Deficit

Well, I can't help thinking some people have an obsession with fiscal deficits at the moment, I really can't. EU finance and economy ministers, meeting yesterday in Luxembourg, took it upon themselves to criticise the Czech government for their fiscal policy telling them in the process that they must "take effective steps" to cut their budget deficit to bring it into line with European Union rules, and that they must do this no later than next year. In fact they have given the Czech Cabinet until April 9, 2008 to take measures to ensure that next year's fiscal deficit, adjusted for one-time factors, falls below the EU limit of 3 percent of gross domestic product. At the present time the Czech government government projects a fiscal deficit of 3.6 percent of GDP this year, compared with an initial 4 percent target.

Now in the face of ageing societies I am all for structural reforms and fiscal rigour I really am, but I think there is a time and a place for everything, and a sense of proportion is needed here. The Czech economy is, as I tried to have illustrate yesterday, one of the few real relative success stories to be found among the EU 10, and as such there is a real need for balance and for classifying issues in terms of their importance here. (This stance on the Czech Republic seems to parallel recent exchanges over the level pf the current French deficit between Trichet and Sarkozy, exchanges which seem truly out of proportion when you consider the extent of the accumulated debt problem which exists in say Italy or Greece, and well, I would make a similar point about how the Czech Republic. "Overheating", while still an issue, is far less problematic in Czechia than it is in many members of the EU10, and this "detail" would be my personal initial point of departure for assessing the robustness of the Czech economy, and the margin for manoevre the government may or may not have in terms of fiscal deficits).

The Problem Facing the EU10

Basically the principal outstanding issues confronting the EU10 countries are threefold:

1/. Labour capacity constraints (which are normally a by product of long term low fertility and large scale recent migration flows) producing significant wage inflation and strong overheating.

2/. Structural dependence on external financing leading to current large current account deficits.

3/. Loss of control over domestic monetary policy due to eurozone convergence processes which - with or without the presence of formal pegs - make gradual downward adjustment in currency values as a alternative to strong wage deflation virtually impossible. This issue is compounded by the likely private "balance sheet consequences" of any sustained downward movement in the domestic currency given the widespread use of mortgages which are not denominated in the local currency.

Now the worrying part about all three of these is that they are not simply cyclical in character. As such they are not problems which will "self correct" as a result of a recessionary slowdown, whether this be of the "soft-" or "hard-landing" variety. This problem simply is not being taken into account in many of the current pronouncements on the EU10, and certainly is in no way reflected in the current "deficit obsession" which we can see at EU Commission level.

The Immediate Problem


The current controversy has its roots in a decision by the Czech government last September to push through Parliament a set of tax changes and spending cuts that are intended to narrow the fiscal shortfall to 3.2 percent of GDP next year and 2.8 percent of GDP in 2009, an outcome that the Czech finance ministers consider to be "plausible'' in spite of the "considerable uncertainties'' which are linked to the tax overhaul.

The controversy has of course been well served by a 17 percent jump in welfare spending approved before elections last year, and these have, of course, boosted spending even as a record 6.4 percent pace of economic growth in 2006 brought in more tax revenue than expected. The economy is expected to expand 5.9 percent this year, according to the Finance Ministry forecast in the 2008 draft budget.

``In the absence of measures to address the budgetary impact of aging, the debt ratio is likely to increase significantly over the next decades'' from about 30 percent of GDP now, EU finance ministers said, in their statement. I agree completely, but are we not in danger of confusing two issues here, longer term structural issues, and short term budgetary ones?

Certainly, when compared even with many existing eurozone members, the Czech deficit problems can hardly be said to be of the "basket case" variety:



And as the EU finance ministers accept, the debt to GDP ratio - which is currently around 30% - is hardly huge in comparison with some others I could mention.



So the issue here is the need for longer term structural changes - just like in France - and the best way to achieve this may be by presenting the necessary laws and longer term reforms, and not by focusing on short term deficit issues. As I have indicated, there are far more pressing issues on the table all over the place at the present time.

And even when we come to the external balance position, the Czech position is far from being a chronic one. Trade in goods and services is now in balance:


And even the CA deficit, which does need addressing, is not large in comparison with many of the rest in the EU10.





Finally, and as an example of a more balanced view I would draw attention to the fact that the most recent IMF staff report on the Czech Republic had this to say:

Lingering slack in the labor market has helped contain wage inflation. Despite strengthening demand for labor, suggested by rising vacancies, wage pressures have remained subdued, as rising inflows of immigrant workers have helped offset the impact of population aging on labor supply. Recent employment gains have been concentrated in industry and private services, including real estate, and do not yet appear broad-based. Unemployment has fallen, but remains around 7 percent, as continued geographical and skill mismatches have kept structural unemployment high.

and this:

The main concerns center on the erosion of fiscal discipline in 2006-7 and the medium-term fiscal outlook. The expansionary fiscal stance for 2007 is out of place in view of the expected robust growth. The authorities’ medium-term consolidation plans are appropriate, but supporting measures should be identified without delay. A cutback in high mandatory social spending would improve fiscal flexibility and efficiency. The institutional fiscal framework also needs to be strengthened.

Well exactly. So let's just try and keep things in proportion, shall we?

Czech Inflation September 2007

Czech inflation accelerated to the fastest in 13 months in September, closing in on the central bank's target and suggesting interest rates may rise again as early as this month. Consumer prices rose an annual 2.8 percent, up from a 2.4 percent in August, according to the Czech statistics office.



The central bank has been lifting what are the European Union's lowest interest rates for two years now on concern the consumption-driven expansion will foster price growth. Policy makers target inflation one point either side of 3 percent and have signaled borrowing costs will have to rise further because consumer-price increases are forecast to exceed 4 percent next year. The central bank foresees annual price growth of as high as 4.5 percent next year, driven by higher indirect taxes and wages pressure from a rapidly tightening labour market.

The mid-point peak of the so-called monetary-policy inflation, which excludes the effect of one-time changes in indirect taxes that the central bank omits, is projected to jump to 3.7 percent in 2008 from about 1.8 percent in September. Central bankers raised the key two-week repurchase rate in May, July and August, bringing it to 3.25 percent, a level which still significantly below the European Central Bank's current 4 percent refi rate.

The month on month price change was in fact pushed into negative territory - a drop of 0.3% in the index between August and September - by a seasonal drop of costs of travel packages, which were on average 16.1 percent lower last month than in August.

What is most interesting about the Czech situation is how different it is from many of the other EU10 economies. Despite the fact that GDP growth has been strong in recent quarters:




and a brisk, but not exaggerated, pace of growth in retail sales:




With unemployment coming down quite fast:





Wage costs have not gone through the roof, Baltic style, at least not so far they haven't. There are, however, distinct indications in the chart below that wages inflation has accelerated since the start of 2006:



and this has been reflected by a steady uptick in producer prices, although this has started to ease off a little since June.




Obviously a number of factors are at work here, but could one of them be the fact that the Czech Republic far from losing workers on a net basis to out-migration in recent years, has actually been able to attract inward migrants in significant numbers.


So while Czechs have left to work elsewhere in significant numbers since the turn of the century, the Czech Republic has been more than able to compensate for this by attracting workers from elsewhere. Obviously all of this is not completely problem free, in that wage pressures are building up. But the situation is certainly strikingly better than in many other EU 10 countries. Is there a lesson here for anyone?

Czech Central Bank Maintains Interest rate

The Czech central bank kept its benchmark interest rate unchanged at the lowest level in the European Union's lowest level yesterday, after perviously raising it three times this year, citing in justification for the decision the stronger koruna and increased global borrowing costs.

At the close of the meeting, the Board decided to leave the CNB two-week repo rate unchanged at 3.25 %. All six board members present voted in favour of this decision.

Key Czech Economic Indicators

• Price indicators:

- annual industrial producer price inflation in August (3.7 %)
- annual agricultural producer price inflation in August (15.6 %)

• Leading indicators of growth:

- annual growth in retail sales in July (8.9 %)
- annual growth in industrial production in July (11.5 %)
- annual growth in construction production in July (-1.7 %)

• External balance:

- trade balance in July (CZK -0.7 billion)


According the the bank press conference presentation:

The risks of headline inflation forecast are on the upside, risks of monetary-policy relevant inflation forecast are on the contrary on the downside.

Major risks and uncertainties:

- tax changes and faster expected growth of regulated prices
- faster then expected growth of food prices
- drop in market expectations of 1Y Euribor rate
- stronger koruna exchange rate against the euro
- lower August inflation and in particular adjusted inflation excl. fuels
- extent of fiscal restriction in 2008

Bank Governor Zdenek Tuma indicated at the press conference that the bank may reduce its forecast for future interest rates next month. Policy makers have previously said more increases are needed through 2008 to combat the effect of rising domestic demand and excise taxes. The koruna, which rose 2.1 percent against the euro in the past seven weeks, and the rising cost of credit, may have eased that concern.

``The koruna has been stronger than we anticipated in the latest forecast'' in July, Tuma said. ``There is a great question-mark'' over the impact of the global market turbulence on economic growth, inflation and monetary policy, which ``will be a subject to study'' in the next few months.

He also suggested that inflation adjusted for one-time effects is more likely to undershoot July's forecasts than exceed them, even as the headline inflation rate may rise higher than estimated.

The inflation rate rose to 2.4 percent in August from 2.3 percent in July, 0.2 percentage point below the central bank's forecast for that month.

"The monetary-policy inflation is what we react to directly...it is below our forecast ....Were we to evaluate that the secondary effects of tax and regulated-price changes..... we feel that will not be too significant, and that could theoretically lead to a somewhat lower interest rate trajectory"

Still, the central bank sees ``upside risks'' to its quarterly inflation forecast from rising taxes and regulated costs as well as from a larger-than-assumed jump in food prices.

The banker also expects an upward ``correction'' of inflation by the end of the year in the order of fractions of a percentage point after the impact of a new methodology on measuring inflation introduced this year led to unexpectedly slow price growth.

A reduced outlook for interest rates in the euro region, being one of the most marked effects of the turmoil on global markets, is also a risk to the bank's inflation prediction, according to the central bank chief.



The government's fiscal policy next year, which will be reflected in the October inflation prediction, may be more restrictive than expected, Tuma said.

The koruna has been the best performing emerging-market currency against the euro in the third quarter, reversing a trend from the first half when it lost 4.1 percent. It was trading at 27.595 to the euro as of 5:06 p.m. in Prague, compared with 27.620 yesterday.

The currency's gains cap inflation by making imports cheaper and undermining export revenue. The koruna is used for so-called carry trades when investors buy higher-yielding assets using loans taken out in currencies with low interest rates. With the recent aversion to risk on global credit markets, investors unwound those trades, buying back the koruna.

Czech Economy Expands Strongly in Q2 2007

The Czech Republic's economy expanded an annual 6 percent rate in the second quarter on the back of strong household spending and investment growth according to data released today by CSU, the Czech statistical office. The growth rate, which has been at 6 percent or over for nine consecutive quarters, compares with a revised 6.4 percent pace in Q1.

The Czech central bank has raised interest rates three times so far this year due to concern about the pace of household consumption growth. Czech household consumption rose 6.5 percent in the second quarter, the second-highest growth rate in nearly four years, compared with 7.2 percent in the first three months of the year. Gross fixed investments rose at an annual 4.2 percent, according to the statistical office, while inventories rose by 44.1 billion koruna from a year earlier. Imports of goods and services, calculated in constant prices, rose 13.9 percent from a year earlier, outpacing exports which recorded 13.8 percent growth.

Government spending fell 1.6 percent in the April-June period.

In the second quarter, retail sales grew an average 7.4 percent, compared with an average 9.4 percent in the first three months of the year.

Real wages grew 4.9 percent in the second quarter, slower than 6.3 percent in the first three months of the year. The unemployment rate in June reached 6.3 percent, the lowest since the data series was started in 2004.

The Finance Ministry estimates growth at 5.8 percent this year and 5 percent in 2008.

Czech PM wins fight for tax cut package

From the Financial Times today:

Czech PM wins fight for tax cut package

By Katka Krosnar in Prague

Published: August 22 2007 02:14 | Last updated: August 22 2007 02:14

The Czech parliament on Tuesday approved a public finance reform package that would cut corporate tax to 21 per cent next year.

Under the reforms proposed by the centre-right coalition government of Mirek Topolanek, prime minister, the corporate income tax rate will fall from 24 per cent to 21 per cent next year, then by a further 1 percentage point in 2009 and 2010.

A simplified individual income tax rate of 15 per cent is to be introduced next year, falling to 12.5 per cent in 2009.

The backing for the reform package, albeit by a slim two-vote majority, was a big victory for Mr Topolanek who faced a backlash by rebel MPs from his own Civic Democrats party led by Vlastimil Tlusty, the former finance minister. Mr Tlusty had threatened to vote against the bill, arguing it would make many families worse off.

Mr Topolanek had earlier warned that the ruling coalition would collapse if the package was rejected and the government would be unable to prepare a budget with a deficit of less than 3 per cent of GDP, a key criterion for euro adoption. But some analysts said on Tuesday the reforms did not go far enough to rein in public expenditure as the Czech Republic faces a 3.9 per cent public finance deficit this year.

Under the reforms, social benefits including sick pay, long-term unemployment benefit, one-off new baby payments and child benefit would be cut, while the VAT rate for food and medicine would be raised from 5 per cent to 9 per cent. Fees for consulting doctors would also be introduced.

“The vast majority of steps in this bill are positive and will not worsen the situation for people,” Mr Topolanek insisted on Tuesday.

With GDP growth of 6.4 per cent last year and the finance ministry forecasting 5.8 per cent this year, analysts say now is the time to implement wider-reaching spending cuts.

“These reforms will not dramatically improve the public deficit. There is no reason to cut taxes right now and the government is not tackling the key problem of huge social spending,” said Vadimir Pikora, an analyst with Next Finance.

Ales Michl, an analyst at Raiffeissenbank, said: “These watery reforms lack vision and ambition and do nothing to solve the deficit. The government should be seriously cutting public expenditure particularly in state orders, the health sector and social benefits.”

Pavel Sobisek, an economist at HVB, said that without the reforms euro adoption would be impossible in 2012.

The bill must now be approved by the Senate, where the ruling parties have a majority, and then by President Vaclav Klaus.

Looking at my last post about labour shortages in the Czech Republic you may well wonder what all this activity reported in the Prague Post is in fact all about:


Police raids prepare for Schengen

Illegal immigrants targeted in nationwide crackdown

By Hilda Hoy
Staff Writer, The Prague Post
July 4th, 2007

With the long-awaited entrance into Europe’s border-free Schengen zone fast approaching, Czech law enforcement is keenly following through on promises to beef up controls against illegal immigration.


That means increased police raids against illegal immigrants in Prague and beyond, said Kateřina Jirgesová, spokeswoman for the Foreigners’ and Border Police. “With the upcoming entrance into Schengen, more intensive illegal activities … related to illegal entrance or stay here can be expected,” she said. “The goal of these [police raids] is to eliminate such activities.” On June 21 and 22, some 500 officers from the Foreigners’ and Border Police carried out planned raids in five urban areas around Bohemia. Focusing on areas where migrants might congregate or work — such as marketplaces, train and bus stations, construction sites and accommodation hostels for construction workers — the officers checked nearly 4,600 foreigners, Jirgesová said. Out of those checked, 48 were taken into custody. Eleven were ordered expelled from the country. Police filed charges for 252 infractions, for everything from illegal stay to lapsed health insurance to failure to carry proper identity documents. A week earlier, the Foreigners’ and Border Police had also participated in a trans-border, cooperative police action against illegal immigration, said Interior Ministry spokesman Petr Vorlíček.


Law enforcement across eight countries — the Czech Republic, Slovakia, Germany, Austria, Hungary, Slovenia, Switzerland, Italy and France — collaborated to check immigrants in their respective countries and exchanged information and strategies. “It was one of the preparations for Schengen cooperation, because it is going to be necessary to work closely like that,” Vorlíček said. “These initiatives are going to be happening regularly, and their importance will increase after border controls are canceled.” Last year, 11,488 individuals entered or stayed in the Czech Republic illegally, Jirgesová said.


The Czech Republic is slated to join Schengen at the end of this year along with the nine other Central European and Baltic states that joined the European Union in 2004. However, admission is still contingent upon gaining the European Commission’s final approval for preparations made in the areas of border controls, transnational cooperation and visa and immigration, particularly for countries such as Slovakia that would be on the outer edge of the Schengen zone. The Czech Republic is coming along very well with those preparations, said Franco Frattini, European commissioner for justice, freedom and security, during a visit to Prague June 14.

But along with such initiatives should come increased training for police officers to understand the situation of immigrants, both legal and illegal, who have made the country their new home, said Viktor Rajčinec, chairman of the Ukrainian Initiative in Prague. Ukrainians make up approximately 70 percent of the illegal immigrant population here, the Czech News Agency (ČTK) reported. Officers should receive more training on the specific issues different immigrant communities face, and also learn more about the complex bureaucracy and paperwork behind immigration. “Sometimes the police don’t have a clue what’s going on,” he said. Rajčinec also hopes the Foreigners’ and Border Police will accompany its increased pressure on illegal immigration by making more attempts to improve its services to the legal immigrant community. “It would be great if the police worked in a more flexible way, and that there would be better conditions [at the Foreigners’ Police] so that people don’t have to jostle and push there. This would really help everyone,” he said.

Laying down the law

On the other side of the equation, lawmakers have also been taking steps to ensure that the Czech Republic joins Schengen without a hitch. On June 25, President Václav Klaus signed a bill into law that imposes tougher sentences against anyone involved in human smuggling. Those convicted could face up to 15 years in prison, ČTK reported. Preventing illegal immigration through legal channels will be an increasing priority, said Interior Ministry spokesman Vorlíček. “A lot of legislative changes have already been introduced,” he said, in particular laws regarding air and land border control and laws regarding the residency of foreigners.

A Growing Number of Czech Companies Have Problems Finding Employees

Three quarters of Czech companies have problems finding employees, Hospodarske noviny reported on Monday. The biggest Czech car-manufacturer Skoda auto, for example, allegedly lacks 500 employees. The shortage is most prominent in the industrial sector, where 88 percent of companies are currently looking for new employees. Lorry drivers, shop assistant and IT experts are also in short supply. One third of Czech companies rely on foreigners and some have started employing pensioners and women on maternity leave.

According to data released by the Czech Ministry of Labour and Social Affairs there are more than 200,000 foreign workers, mostly manual labourers, currently employed in the Czech Republic. They come mainly from Slovakia, Ukraine and Poland. The ministry plans to introduce a so-called green card system to facilitate the employment of qualified workers from abroad.

Czech Republic Labour shortage once again on the agenda

Rob Cameron of Radio Praha back in May:


Labour shortage once again on agenda as government looks abroad

The financial daily Hospodarske noviny carries a long article on Tuesday about the problem of labour shortages in the Czech Republic, the latest coverage of a much-discussed issue in this country. The estimates are gloomy, and the government's attempts to counter the problem don't seem to be bearing much fruit. But is the situation really that bad, and will fresh attempts to attract foreign employees work?

Listen to the doom-mongers and you'd be forgiven for thinking the Czech economy is on the verge of grinding to a halt because of a shortage of labour. The Labour and Social Affairs Ministry estimates there are currently some 50,000 unfilled vacancies for skilled workers in the Czech Republic, and predicts that in 25 years, the figure will have risen to 400,000.

Hospodarske noviny quotes a study by a Dutch research agency called SEO, which makes the startling claim that by 2050, the Czech economy will be lacking some 1.5 million workers. But how accurate are these predictions? Daniel Munich is a labour market specialist for the research institute CERGE:

"It's very difficult to disentangle actual demand from existing statistics, because the statistics are strongly dependent on the willingness of institutions and companies to report to public institutions. So these estimates are rather questionable, but based on various indications, there really is a shortage of skilled labour in the Czech Republic and something should be done."

The biggest problem seems to be in the engineering sector, where mechanics, welders and machine repairers are in great demand. There is also a much-publicised need for doctors, architects and civil engineers. So what explains the shortages? Daniel Munich again:

"First, the Czech economy is growing at a relatively high rate. New companies are coming from abroad, local successful companies are growing, and at the same time we inherited from the communist past an extraordinary low share of highly-skilled population, given the low supply of tertiary education. So taken together, this creates our current situation."

Previous attempts to attract foreign labour to fill the shortfall appear to have achieved little. The previous Social Democrat-led administration launched a scheme to attract qualified workers from countries such as Bulgaria and Croatia. That scheme, says Hospodarske noviny, seems to have been an unqualified failure. Of the 600 people who took part, just 30 were "new" arrivals. The remainder were people already living here who saw the scheme as a way of speeding up the process of gaining permanent residence.

Now the centre-right cabinet wants to loosen up the residence and work permit regulations even further in a bid to attract more skilled workers from abroad. Daniel Munich says that can only be a good thing:

"The system, as it was and still is here, is quite complicated and quite unfriendly to these highly-skilled people who have many other options with regard to work. So if we don't change this system, we would be losing this valuable asset of human capital, which was financed by somebody else - in this case by other countries, and it's a smart government which makes it easier."
So putting a friendly face on the process of applying for a residence permit - issued by the dreaded foreigners' police - will, says Daniel Munich certainly help. But some analysts believe the Czech Republic has a bigger problem. They point out there is little motivation for skilled labourers to settle here, when they could choose other countries further west, where wages are higher and the bureaucracy more friendly to foreigners.

Immigration only short-term solution to labour shortage

Commentator Lubos Palata wrote in Lidove Noviny Thursday that the Czech Republic's shortage of qualified workers can be made up for by "imports from abroad" in the short term only. He is evidently write, since basically the supplies of such immigrants will soon run out (and here). He would also do well to consider that if you want a domestic labour supply you need children, so doing something about the low fertility problem, and more to help working mums, should definitely be a number one priority.


Immigration only short-term solution to labour shortage
By ČTK / Published 17 August 2007
Prague, Aug 16 (CTK) - The Czech Republic's shortage of qualified workers can be made up for by "imports from abroad" in the short term only, commentator Lubos Palata writes in Lidove noviny Thursday.

He is commenting on politicians' effort to fill the growing number of empty jobs with immigrants and guest workers.

He says that if the country remained open to the import of a cheap workforce from the East, it would become even more attractive for foreign investors, and it could become Europe's largest assembly hall of cars, computers, LDD displays and many other things in a few years.

"The combination of a person who works for the east European wage and central European infrastructure, complete with the EU market and Brussels-guaranteed investment certainties, is an irresistible attraction," Palata writes.

He writes that foreigners have brought many positive things to the Czech Lands throughout history. The truth is that almost all Czech towns were founded by German settlers, Palata writes

"But never has 'the import of a cheap workforce' from less developed countries been a long-term positive step," Palata writes.

He says that "the Czech workforce should not be cheap, but expensive, qualified and of good quality."

Palata writes that the import of foreign workforce may not result in the revival of the Czech Lands as an industrial power of central Europe but in the definitive liquidation of the heritage that has survived in the country since the times of the Austro-Hungarian monarchy, of which the Czech Lands were part.

He writes that the massive import of a cheap workforce from Ukraine or Moldova will further lower the already low motivation to develop a quality technical education.

"The cheap workforce that is imported en masse and with state support destroys the job market...Investors who build a plant here and then find out that no one will work for them at the assembly line for 15,000 crowns, should pack up and leave, and not import with state support Ukrainians who are ready to work even for the money offered," Palata writes.

He writes that the Czech Republic should be sufficiently self-conscious and say that the reputation of a country with a cheap workforce is no longer enough for it.

The country must follow a path that leads "via universities, research institutes, good-quality and effective work, able managers, and politicians, if not statesmen who think about the future," Palata writes.

The Czech Republic should not be a country where there is work for every "cheap foreigner," but a state where it will be an honour for a foreigner to get a job, Palata writes.

Czech Republic building output down 4.4 pct in June

From the Prague Monitor:

Building output down 4.4 pct in June in 1st fall this yr


Building output in the Czech Republic fell by 4.4 percent year-on-year in June after a thirteen-month growth, the Czech Statistical Office (CSU) announced Monday.

Against May, seasonally adjusted building output dropped 0.2 percent.

"The decrease in construction output in June was affected by - a high growth of construction output in June 2006, increasing shortage of skilled building workers and problems in the market of certain building materials," the CSU said.

Next Finance analyst Vladimir Pikora ascribes the fall in output in particular to the high comparative base from last year when many people tried to avoid potential VAT growth for construction work and took mortgage loans.

The unusually warm winter allowed boom in construction in months when construction work is usually at low levels, he said.

"Thus, building material producers and sellers have empty warehouses as for some goods, which slows down construction and makes it more complicated. Moreover, building companies say they lack qualified staff," Pikora added.

From a broader viewpoint, it can be seen that the sector fares well, he said.

Average growth rate in the last twelve month stands at 13 percent and in the first half of this year, the sector grew by 12.7 percent.

Problems linked with the preparation of projects and their financing also took their toll, the CSU said.

In the second quarter, building output rose by 3.7 percent year-on-year, average registered workforce fell by 1.7 percent and average monthly nominal wage rose by 7.8 percent.

Planning and building control authorities granted 16.5 percent less building permits and the approximate value of the permitted constructions was 14.4 percent lower.

In June, new construction, reconstruction and modernisation recorded a 4 percent decrease, of which civil engineering work fell by 9.8 percent and building construction grew by 0.1 percent.

Repair and maintenance fell by 19.5 percent and other work recorded a drop of 47.2 percent. Construction work abroad grew by 53.3 percent.

Contracted construction work carried out by construction enterprises with 20+ employees fell by 4.7 percent year-on-year at constant prices.

The number of employees in construction enterprises with 20+ employees dropped by 2.2 percent against June 2006. Average monthly nominal wage of employees increased by 3.4 percent year-on-year and reached Kc21,124 (the real wage rose by 0.9 percent).

Average hourly wage grew by 9 percent year-on-year and stood at Kc137. Labour productivity per hour worked grew by 2.7 percent.

Planning and building control authorities granted 9,560 building permits in June 2007 (of which 5,258 for new constructions and 4,302 for renewals and enhancements). The number of building permits granted fell by 21.5 percent year-on-year.

Approximate value of constructions permitted in June 2007 increased by 7.3 percent in comparison to June 2006 and reached Kc28.3bn. New construction is valued at Kc20.3bn (up by 18.4 percent), the CSU said.

Planning and building control authorities permitted the construction of 3,369 dwellings, which was 334 dwellings fewer (-9.0 percent) than in June 2006. Out of that, 2,895 dwellings will be obtained by new construction and 474 dwellings by renewals and enhancements. The approximate value of newly permitted dwellings in multi-dwelling buildings was Kc7.2bn.

According to Eurostat News Release, seasonally adjusted construction output in the EU27 grew by 1.9 percent yr/yr in May 2007.

Among the EU member states for which data were available, the highest increases were observed in Slovenia (+48.7 percent), Romania (+27.6 percent) and Poland (+16 percent).

The biggest decreases were recorded in Portugal (-4.9 percent) and Germany (-2.7 percent).

Czech Interest Rates

The Czech central bank looks poised to raise its benchmark interest rate by a quarter-point to the highest in almost five years in a bid to curb accelerating inflation. Bloomberg today:

The bank's seven-member board will lift the 14-day repurchase rate, now the lowest in the European Union, to 3 percent today in the second increase this year, according to 21 of 23 economists in a Bloomberg survey. Two forecast no change. The Prague-based central bank typically announces its decision around noon.

Policy makers say they're concerned inflation, which picked up to 2.5 percent in June, is nearing the bank's 3 percent target faster than predicted after the koruna declined and wage growth and falling unemployment triggered consumer spending on homes, cars and household goods. Price growth must be kept at bay to meet terms for adopting the euro in the next decade.

The koruna was trading at 28.138 to the euro as of 9:41 a.m., compared with 28.147 yesterday. The currency has declined 2.3 percent against the euro this year, following a 5.5 percent appreciation in 2006. A strong koruna keeps down import prices, helping control inflation.

Economists said Czech policy makers are left with little choice today because the economy is growing at more than 6 percent for a third year, fueled by household demand. They're split on whether the increase will be the last this year.



Retail sales rose an annual 7 percent in May, following an 8.1 percent increase in April and a record 10.5 percent in March. Producer prices rose at the fastest pace in five months in June, bringing the annual rate to 4.6 percent, the highest in more than two years.

A record low jobless rate and a record number of vacancies have raised concern of a shortage of workers and rising wages. Adjusted for inflation, wages grew 6.2 percent in the first quarter, the most in three years.

The labor market will be ``crucial'' for inflation, central bank Deputy Governor Ludek Niedermayer said on July 12.

Bank Forecast

Economists expect the bank to raised its quarterly inflation forecast today, after predicting in April an annual rate of between 3.2 percent and 4.2 percent in December. The central bank targets inflation at 3 percent plus or minus 1 percentage point.

The April inflation rate of 2.5 percent was a half-point higher than the central bank's prediction for that month.

Annual inflation may approach 4 percent later this year and accelerate to as fast as 5 percent next year if the government pushes through changes to the tax system to be introduced in 2008, economists said.

``The last time we saw such high inflation was for several months in 2001 and before that in 1998,'' said Miroslav Plojhar, an economist at JPMorgan in London.

Czech Republic Recruiting Labour in Vietnam

rom Vietnam Net:


Vietnam hopes to export labourers to Czech Republic

The Czech Republic is a potential market for Vietnamese labour export as its booming economy ignites the need for skilled workers, the head of the Department for Labour Export, Nguyen Ngoc Quynh, said.

According to Quynh, Vietnam can also take advantage of the Czech Republic’s open policy on labour import setting no quota on the number of workers.

Quynh said some 10 businesses would be selected based on strict criteria for exporting labourers to central European country. His department will work with eligible businesses on the recruitment and training or workers and discuss granting visas to Vietnamese labourers with Czech authorities.

Since 2006, several Vietnamese businesses have sent around 200 labourers to the Czech Republic on trial runs. Labourers enjoy good working and living conditions with incomes ranging from 600-700 USD per month, Quynh said.

From Hanoi to Praha

From Prague Monitor 3 Dec 2007


Právo: Germany fears influx of Vietnamese from ČR
By ČTK / Published 3 December 2007


Accusations of corruption against the Czech embassy in Hanoi have become stronger with the approaching Czech entry to the Schengen area and the German Intelligence Service BND even mentioned it in its internal report warning against a possible influx of Vietnamese to Germany, the daily Pravo wrote Friday. Foreign Ministry spokeswoman Zuzana Opletalova told CTK the ministry had no information about corruption at the embassy

The ministry has repeatedly said that numerous inspections at the embassy failed to prove any cases of corruption, adds Právo.

The Czech embassy in Hanoi at present faces a new wave of complaints about corrupt practices of its employees.

According to the Saxony daily Freie Presse, the BND pointed to the corruption at the Czech embassy in Vietnam in its secret report.

The report allegedly warns German authorities against an influx of Vietnamese to Germany from the Czech Republic after it joins Schengen, Pravo says.

"We have registered the fact, but we cannot comment on the working relations between Czech authorities and our German colleagues," Bohumil Srajer, spokesman of the Czech civilian intelligence UZSI that exchanges information with BND said.

"The biggest danger is that the issuing of non-transparent visas to Vietnamese threatens the implementation of the project of green cards that the Czech Republic plans to introduce for foreigners," lawyer Marek Sedlak who deals with the problem told Pravo.

"The system of green cards will not function if the people who would like to work in the Czech Republic would have to pay an additional up to 2500 crowns in bribes to obtain visas," he said.

According to the information from the Vietnamese embassy in Prague, Czech companies have asked for about 4000 workers from Vietnam, but these people are unable to obtain visas, Sedlak said.

"These are old anonymous complaints and our ministry's General Inspection has found no proof on the spot," Czech Foreign Ministry spokeswoman Zuzana Opletalova said.

"We have not received any proof from the intelligence service. In addition, Schengen will only change the practice of short-term visas while issuing of long-term visas will remain in the jurisdiction of Schengen member states," Opletalova said.

Nevertheless, the office of the Czech ombudsman is dealing with the situation at the Czech embassy in Hanoi.

"The reports are alarming. I would not view them as pressure exerted on the embassy by Vietnamese," lawyer Jan Chodera told Pravo.

He said he had sent a letter to Foreign Minister Karel Schwarzenberg, proposing to change the procedure of issuing of Czech visas for the Vietnamese.

"Vietnamese applicants for Czech visas should first send written inquiries to the Czech embassy in Hanoi and the applicant should be invited to come to the embassy at a fixed day and at fixed time in written," Chodera proposed in his letter to Schwarzenberg.

Previously, Pravo wrote about the growing number of Vietnamese visa applicants' complaints about bribery of Czech embassy clerks.

At present, about 40,000 Vietnamese work and do business in the Czech Republic.

According to Pravo, 7,839 applications for long-term visas were submitted by Vietnamese last year, which is twice as many as in 2005.

Carmaking in Eastern Europe

This isn't about the Czech Republic in fact, but about the more general issue of shifting car production to the East as outined in this FT article. As I said in this post, this is a normal pattern to expect as these new EU members move up the value chain, but many in Western Europe still need to face up to this reality I feel.

If the 2,300 workers at Peugeot's Ryton plant are the past, then the future may lie in Slovakia, the country of just 5.4m people that will soon be making more cars per head than anywhere else in the world.............Carmakers from General Motors' Opel subsidiary through to Renault, the Volkswagen group and Ford have set up manufacturing capacity or established joint ventures with Russian and other local carmakers at more than a dozen sites in central and eastern Europe.

By 2008 Slovakia will be turning out 1m cars a year – compared with 1.6m in Britain this year. The reason is simple. The average gross wage a month for a car worker in Slovakia is £350 – compared with about £2,000 for assembly line workers at Ryton.

Slovakia has shot from nowhere to pole position during the past three years as both PSA Peugeot-Citroen and Kia of South Korea followed Volkswagen's early example and chose to build assembly plants there to take advantage of the country's low production costs.

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.Peugeot claims that production at Ryton is costing it €415 (£287) more per car than at the company's Poissy plant in France and almost €1,000 more than at its joint venture factory with Toyota in the Czech Republic.

Peugeot will invest a total of €1.1bn in its Trnava plant in western Slovakia, which will start producing the new 207 model in June and turn out 450,000 cars a year by 2009.

Kia will invest €835m in Zilina in north-west Slovakia, where production should start in December.

The economic benefit will be tremendous. Automotive production has grown from 14.3 per cent of industrial production in 1998 to 24.8 per cent last year and it now represents 29 per cent of exports and employs 65,000.

Labour costs are not Slovakia's only advantage. It has a strong manufacturing tradition, having being one of the biggest arms producers in the Soviet bloc, and these skills have been transferred to the automotive sector. Weak unions and a liberal labour code mean that labour is more flexible than in western Europe.

VW's Bratislava plant – the only plant running at the moment – specialises in off-road models such as the Touareg but it has also produced other models when required; when VW's Spanish workers refused to work extra shifts in 2002, Bratislava turned out Seat Ibizas.

The Czech Car Growth-Engine?

News today which is of more than passing interest from the Czech Republic. The South Korean industrial group Hyundai has announced that it is going to build its first European car plant at Nosovice. The factory - which is scheduled to cost around one billion euros - should begin production in October 2008 with full capacity of 300,000 vehicles a year being reached in 2009. This new output, when added to added to the 600,000 cars or so produced annually by Volkswagen's Skoda Auto and the Franco-Japanese joint venture, TPCA, will bring the Czech Republic into the front line - along with Germany, France and Italy - of the European automotive industry.

As elsewhere this will have its good and its bad side.

The investment will obviously give an enormous push to Czech skill-cluster accumulation. As the AFP article notes Hyundai was attracted to Czechia by the existence of an already established network of auto suppliers, good transport communications, low wage costs and a skilled, adaptable workforce. Since in this industry more feeds more this new impetus could then attract even more car and car component manufacturers, especially anyone who is trying get a foothold in the European market.

On the downside the Czech economy will now become even more heavily car dependent. The car production and components sector already accounts for around 20 percent of total industrial production and it constituted 18 percent of total exports in 2005, so any real downturn in the European car market would now hit them especially hard. And again, very few goodies come for free. The impact of the new investment on the domestic currency - the koruna - is likely to be to nudge it upwards, and as some are noting, this may hit other lower-wage-lower-skill areas like textiles. But this is a price which needs to be paid as Czechia moves up the 'value-component' ladder, and it is nice to see that they are making such rapid progress.

The inward investment could attract an inflow of labour too, and this will only help them better address their low fertility and ageing problems. Some suggest that the only brake to further auto industry development in the Czech Republic would be if companies found it hard to recruit sufficient skilled and re-trainable workers. With this in view it is interesting to note that the plant is to be sited in the East of the country, within striking distance of the Slovak and Polish borders.

Indeed it seem that Poland looks to be one of the big losers here. New Economist had an interesting post last week about how the London-based Centre for European Reform recently put Poland at the bottom of its competitiveness league vis-a-vis the entire group of 25 European Union nations (The report also put Italy as low as 23rd out of the 25 EU members, down in the same league as Bulgaria and Romania).

So here there will be winners and losers, and, just as the New Trade Theorists would predict, there will be a considerable interplay of networking and other 'increasing returns' effects.

Which brings me to my last point: is the Czech Republic about to become a minor EU growth engine, another Ireland? I first raised this point in this post, where I make a comparison with slow growth Portugal (which is, it will be remembered, inside the euro system, and suffering from all kinds of negative consequences following on from its initial dramatic entry). Certainly Czechia's demographics are very different from those of Ireland, but it does have a large number of young people who are able, willing and under-employed, and if it can get those network effects rolling and continue the forced march up the value chain, then being a small country it may be able to attract inward migrants in sufficient quantities to make all the difference. Who knows. As the Spanish like to say, que sera, sera.

The Czech Growth Engine?

Interesting news from the Czech Republic in this week:

The Czech republic has joined Slovenia among new member states with higher levels of wealth per capita than old member Portugal, according to European Commission statistics.

The central European country enjoyed gross income per capita of 73 percent of the EU 25 average last year compared to 71 percent in Portugal, according to the latest estimate by the commission's statistical wing, Eurostat....

The results have left Slovenia and the Czech republic chasing Greece, on 83 percent, as the next old member state to overtake, with Slovenia set to draw level with Greece by 2007 and the Czech republic to narrow the gap further in the next two years, the study predicts.

This now raises some interesting questions. How will Slovenia's future growth compare with that of the Czech Republic (remember Slovenia is about to join the eurozone on 1 January 2007 while the Czech Republic is in no particular hurry to join)? What is the relation between Portugal's low-growth and eurozonemembership? Will the Czech Republic now overtake Greece?

We can also, I think, see more clearly some appropriate comparisons for testing the 'euro has been a spectacular success' hypothesis: we can look at the UK vs France, Finland vs Sweden and Denmark, and we can look at the Czech Republic vs Portugal.