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Czech Republic: Growth To Slacken Next Year, Then Recover

London, 19 December 1996 (RFE/RL) -- An authoritative report published today says economic growth in the Czech Republic is likely to be marginally slower next year while unemployment may increase.

Investment will grow at double digit rates, real wages will continue to increase at about 8 percent, but credit will be harder to obtain.

The report is published by the Paris-based Organization for Economic Cooperation and Development (OECD) as part of a major survey of the economic prospects of its 28 member countries.

The report says the Czech Republic's growth slowed in the first half of this year as the foreign balance deteriorated owing to weak exports. Gross domestic product (GDP) grew by 4.3 percent in the six months, a rate that was half a percentage point slower than for 1995 as a whole.

Estimated growth for all of 1996 is put at 4.8 percent (the same as last year), at 4.6 percent in 1997, and 5.3 percent in 1998.

The predicted acceleration in growth in 1998 is expected to reflect continuing strong investment and a better export performance.

The unemployment rate is expected to be a "low" 3 percent this year but will rise to 3.6 percent next year and 4.1 percent in 1998. These levels are among the lowest of any in the OECD countries.

The report says inflation remained "stubbornly high" at about 9 percent. It should decline marginally in 1997 and more decisively in 1998.

The report says that domestic demand was the strongest force behind the growth in GDP: in 1996, household consumption grew by 5.5 percent and investment by almost 18 percent. In response to the rise in domestic demand, imports grew by an estimated 11 percent.

With exports of goods and services growing by only five percent, slower than in 1995, the trade deficit rose "significantly."

The report say real wages continued to grow at 8 percent compared with growth in labour productivity of about 3 percent.

A sizeable increase in bank lending in the first half of the year caused money supply to grow by 19 percent compared with the same period of 1995. This was 2 percentage points above the upper target set by the central bank. The nominal exchange rate appreciated noticeably as 1996 wore on, suggesting that capital inflows may have resumed.

The report says the Czech economy is still undergoing structural transformation, especially in the banking sector. The concentration of ownership is proceeding and the share of small individual investors is declining in favor of that of large investors. Credit is expected to become less easily available as banks respond to market forces.

The report says economic growth is expected to be better balanced, with investment continuing to grow at double digit rates, and household consumption playing a smaller role in GDP growth.

Import growth will weaken while exports should recover from the recent slowdown. A combination of higher labor productivity and projected wage moderation will have a favorable effect on prices, but the inflation rate will still be higher than the OECD average.

The report warns: "If real wages, the growth of which has exceeded productivity growth for the last three years, fail to moderate, a consumption boom could continue and the trade deficit could widen further."

The report said, in this case, fiscal or monetary policy will need further tightening to preserve exchange rate stability.