How will the pandemic affect the health of the Czech economy?

The coronavirus pandemic has affected almost the entire world. The current situation means that not only healthcare systems of individual countries but also their economies are being put to test. They had to slam on the brakes and will pick up speed very slowly

We have asked Eva Jílková, the manager of the Department of Economics at the Moravian Business College Olomouc, and Jolana Skaličková, an expert in macroeconomics, what performance is hidden under the imaginary hood of the Czech economy and when everything returns to normal.

A stress test in the form of a pandemic can shed light on the strength of the Czech economy. According to current prognoses, the year-on-year economic downturn will be between about 5 and 10 per cent. This is more than in neighbouring states. Does this mean that the Czech economy is coping worse with the pandemic?

Eva Jílková: A pandemic is more than a stress test. It is a situation unparalleled in modern history. Its effects are being felt all over the world and in almost every field, although somewhere more, while somewhere less so. Businessmen in tourism, for instance, are being completely devastated, and as a result, the impacts are strongly felt by services such as hotels, restaurants, fast-food restaurants and buffets, etc. Healthcare and social services are experiencing severe difficulties, and since they are largely public goods or services, mainly the state budget is being afflicted. On the other hand, businessmen have been enterprising and many of them refuse to wait for help from the government. Instead, they are looking for new opportunities and ways to deal with the situation.

I am no macroeconomic strategist nor a forecaster, but I do not think that the Czech economy will suffer more than other countries. Our economy is highly dependent on exports, so closing the borders to exporters is, naturally, an inconvenience. However, this is not only due to government measures, but mainly due to a decline in consumer demand, which has decreased in general, and this shift heralds an impending economic recession.

Jolana Skaličková: What is more, economic development in the coming year will be significantly affected by state interventions, which differ significantly from country to country. Due to school closures, for instance, many companies face the problem of employees not coming to work. It is necessary to realize that in addition to services, there will be a large slump in many large companies, which temporarily suspend production. The state loses considerable tax revenues, and in addition to that, its transfer payments are greatly increased. Furthermore, the incomes of many households are falling. Even though countries that have introduced milder epidemiological measures may not experience such a slump in the near future, the effects may be felt in the longer term.

In recent weeks, we have witnessed a rapid depreciation of the Czech crown. How is it possible that its price has fallen so sharply against the euro? After all, the Czech Republic has not been struck by the pandemic as hard as key Euro-zone countries.

Eva Jílková: This question is related to the previous one. In this regard, the Czech Republic is affected indirectly by the pandemic. The production of commodities that we export stagnates or has stopped (e.g. mechanical engineering). By contrast, the consumption of foodstuffs that we import stays the same. As a result, the demand for foreign currency increases, while the demand for the Czech crown decreases. As we know, the price in the market is formed on the basis of supply and demand. Since the demand for the Czech crown fell, so did its price. As I mentioned, the Czech economy is very open, with a high proportion of the export, and that is why it is also affected by changes in the Euro-zone to a great extent.

Jolana Skaličková: The exchange rate is always determined by multiple factors. Apart from those causing the current depreciation of the Czech crown, I would also emphasize the issue addressed earlier. In the Czech Republic, a greater economic downturn is expected in the near future compared to other countries. Therefore, even in the financial markets there is a considerable sense of unease associated with uncertainty about the future development of the economy.

How long before the Czech crown returns to the value of approximately 25 Czech crowns / EUR?

Eva Jílková: I consider this question to be pointless at the moment. Who cares now? The borders are closed, so it is impossible to leave the country, and it will rather help exporters. As mentioned earlier—if the demand for export goods returns to the original level, the exchange rate of the Czech crown is also likely to approach the original level.

Jolana Skaličková: It is impossible to give a definite answer to this. The subsequent development of the Czech crown exchange rate depends on the development of the pandemic, the government's restrictive measures against it, the related economic development, and on possible interventions by the CNB, which has the most accurate information about the economy. However, I would expect interventions from the CNB only in a more aggravated situation. Still, it is not that the exchange rate of 25 CZK / EUR is ideal. This was the average in recent years. It is also possible that its value will stabilize at a different value if the economy structure changes. Only time will tell.

Will the fall of the Czech crown deeply affect the Czech economy? Will the downturn be felt by consumers in the near future?

Eva Jílková: Consumers will certainly be affected by the economic situation, but mainly by their own, since many businessmen and employees have lost their income or part of it. Therefore, they are likely to cut their consumption a bit in the coming months. This behaviour will again reduce aggregate demand. The impact on consumers will be minimal on goods with haphazard consumption. For small consumers, the depreciation of the Czech crown may be felt in the prices of imported daily consumption commodities.

Jolana Skaličková: It mainly depends on the Czech crown fluctuation timescale. I agree that there will be other—more serious—problems in the economy in the coming period, corresponding to the economic slowdown. From a macroeconomic point of view, they will concern a rise in unemployment and a large national debt. From a microeconomic point of view, they will include the aforementioned reduction in household incomes.

The Czech economy is highly dependent on exports. How will such a fact be reflected in its further development? Is it more of an advantage or a disadvantage for us?

Eva Jílková: It is a disadvantage for us—see the arguments above. The advantage may be that "involuntarily unoccupied entrepreneurs" reorient themselves to the production of imported commodities. However, it is not that simple, because they will have to be price competitive with imported commodities.

Jolana Skaličková: The position of a small open economy makes the Czech Republic heavily dependent on developments in the countries we trade the most with. From this point of view, it is above all a factor we cannot influence much. The question remains whether, in response to the current situation, the Czech economy will begin to focus more on its own self-sufficiency. That includes issues already mentioned by my colleague earlier.

Which parts of the economy will regenerate the fastest? And is it likely for new business sectors to emerge?

Jolana Skaličková: I presume that if the economic recession lasts longer and people struggle with reduced incomes, they will refrain from buying goods that are not essential, and sectors focusing on the production of these goods and services will face problems. It is also likely that the construction industry may be afflicted.

Can the pandemic herald the transformation of the Czech economy? Dependence on one key industry—in our case, the automotive industry—may seem like a major problem.

Eva Jílková: As we can see, it is a problem. Therefore, a shift to a wider portfolio of manufactured commodities could prove advantageous. But again, it has to do with price competitiveness.

Jolana Skaličková: The transformation of the economy structure is a long-term process, and as I mentioned earlier, whether or not it occurs depends on the depth and longevity of the economic recession.

In your opinion, will the market basket of a Czech household change fundamentally?

Eva Jílková: The market basket will probably not change much. It will have the same characteristics that are general for a period of crisis. The structure will be very similar. However, I am not an economic forecaster and I do not specialize in macroeconomics, but we can assume that certain changes will occur in the economy. The government should also take a stand, as after treating the coronavirus, we must treat the economy. Recommendations for the government will now be formulated by the government’s National Economic Council as a professional advisory body, a team of experts whose task is to identify the main issues in the workings of the public sector economy and the problems of the Czech economy’s competitiveness, after which the Council should prepare recommendations for the Czech government. I presume that the recommendations will focus mainly on investments and support for entrepreneurs. If consumption, as a major component of aggregate demand, falls, investments need to be encouraged. We should not count on government investments, as the budget will now be heavily burdened in the social sphere. Moreover, there will be a loss of state revenues as a result of the coronavirus situation. Therefore, we have to have faith in ourselves, in our "golden Czech hands" and our renowned entrepreneurial spirit and the courage to face difficulties with new ideas and projects.

Jolana Skaličková: I agree that there will be changes in a household market basket, as was the case in times of economic downturns in the past—people will mainly purchase essential goods. In conclusion, I would like to point out that one of the factors that influence economic development is the mood in society. That is why it is necessary not to succumb to pessimism, thus worsening the difficult state of affairs that most countries in the world will now face. We are experiencing a new situation, but no crisis has ever lasted forever, and every fall, even an economic one, is followed by recovery and growth.