The countless questions about the future are of concern to most sectors, from the tourism industry to the automotive industry. Since the beginning of the crisis, the Czech government was characterized by a mix of activism and confusion

In mid-May, two months after the state of emergency was declared, practically all economic activities in the Czech Republic were able to reopen. Time has come for companies and retailers to assess damages with an underlay of uncertainty due to possible second waves of the Coronavirus, to state aids and behavioral changes of consumers and business partners.

A ten percent crash

Even though the Czech Republic has avoided a complete shutdown of the economy, as it happened in the most affected countries like Italy and Spain, the losses due to the pandemic are expected to be very heavy. The estimate of the Ministry of Finance, forecasting a drop in GDP of around 6% for this year, is among the most optimistic ones. The Czech Central Bank expects an 8% drop, while other economic analysts are envisioning even darker forecasts. “The prediction of a 10% drop in the economy may have seemed pessimistic, but considering the events of the last weeks we consider it to be the most likely scenario”, underlined Deloitte’s economic analyst, David Marek. The first numbers indicate a 2.2% drop in the GDP in the first quarter, but more evocative will be the data for the second quarter, the most affected by the restriction measures.

According to the estimates of Unicredit, during the months of the state emergency the Czech economy was running at 70% of its potential. But the situation is not equal in all sectors. The most affected activities are obviously the ones that had to close down by government decree, namely retailers and hospitality. In these sectors the decline was even up to 80% and was only partially recovered from e-commerce, street sale or home delivery. Furthermore, meals, drinks and even shopping sessions that were not carried out in these two months will probably not be recovered through an increased demand at the end of the government’s restrictions. Moreover, the rules of physical distancing, which, apparently, will be applying for several months to come, put many operators in further difficulties.

A less critical situation is in manufacturing, which, according to the latest figures from the Czech Statistical Office, marked in March a 10,8 % with a drop of a quarter in the automotive sector. Many industries suspended production in March and April, although there was no legal requirement. Pressured by concerns about the health of their employees, the difficulties in supply chain, extended delivery times, and, last but not least, significant declines in demand, many manufacturing companies, starting with the largest in the country, Škoda Auto, had to shut down their assembly lines. But even among manufacturing companies, the positions for reopening businesses are not homogeneous. The companies that produce capital goods (e.g. machinery) had, on average, a good stock of orders before the crisis. These companies will face many problems, such as renegotiations of some contracts, the recovery of the lost production or more viscous supply lines, but in the second half of the year they could hope for a stronger recovery. However, the producers of consumer goods and other similar, such as vehicles, are likely to face a persistent drop in demand.

Just like any other crisis, even the Coronavirus pandemic has its winners. First of all, these are, for example, online sales platforms for food and frequent consumer goods that experienced an increase in their market share. The online stores claim that the increase in volumes doesn’t automatically translate into an increase in profits, which are already small if not zero in the sector, since the restriction measures led to an increase in costs. Obviously, the platforms are hoping that the increase in market shares will stabilize over time. Many other companies active mainly in the IT sectors and providing platforms for home office, distance learning and such, are hoping the same thing.

One trillion Czech crowns to safeguard the economy

Since the beginning of the crisis, the Czech government was characterized by a mix of activism and confusion. Prime Minister Babiš and his ministers have announced various initiatives to protect economic activities, including the famous trillion Czech crowns of subsidies and guarantees, but the results have been really modest so far. Firstly, the government focused on reducing fixed costs for the businesses affected by the decrees. This includes the Antivirus program, through which companies receive a partial reimbursement of staff costs, the 25.000 Czech crowns for self employed workers and the various moratoriums on the payment of debts and mortgages, or rents. In this latter case, the measures were carried out by weighing on the banks and property owners.

And then, there is the question of liquidity. “It’s clear that liquidity in the Czech Republic is now disappearing faster than it’s being introduced with the varied undertaken measures”, underlines Miroslav Zámečník, economic analyst of the Czech Banking Association. The government subsidized loans and bank guarantee programs had, so far, a budget of a few billion crowns and have been depleted in a few hours. At the end of April, the Chamber of Deputies approved a bill that will allow the launch of a bank guarantee program worth 150 billion crowns designed for small and medium sized enterprises. Subsequently, a certain relief came from the Czech Central Bank which eased its monetary policy and expanded the banks’ scope for action.

The expected cost of the support measures and foregone tax revenues is a deficit that will rise to 300 400 billion Czech crowns. Due to one of the lowest debt rates in the EU, the Czech Republic has still plenty of room for budgetary policies. Until now the government has proceeded having the emergency brake on, and giving priority to scrupulous control to the detriment of the speed of interventions. As several economists recall, even if all government measures would have been implemented, the debt should not exceed 45% of the GDP.

Towards the economy of the future?

The question everybody is asking is how the economy will change after the Coronavirus. So far, there are very few answers and far more wishes and hopes. It’s likely that the crisis will accelerate some trends that are already underway, for example an increase in protectionism. Some sectors will face major restructuring, for example the air transportation. This will create new opportunities and many Czech investors with a good cash availability will want to take advantage of it. On the other hand, the pro-export orientation of the Czech economy could be a disadvantage if protectionist tendencies increase and if the Euro area will be destabilized by a new debt crisis.

The matter of the ecological conversion underlines exactly that trends are not unequivocal. While Germany and other countries are driving by not diluting the goals of the transition, other governments, such as the Czech one, see the Coronavirus crisis as an opportunity to suspend these goals. The outcome of a government meeting in late April, when the ministers decided to cut green energy subsidies and provide government guarantees for the construction of new nuclear reactors in Dukovany, shows that the change is not immediate nor obvious. More than just a plan, the motto of the Czech Republic: The Country for the Future remains a propaganda slogan.

by Jakub Horňáček