Covid-19 in the Czech Republic

18 June 2020

The Czech Republic has managed the Covid-19 pandemic well, but can it weather the economic storm?

Bradley Blankenship

On March 1, the Czech Republic had its first reported case of Covid-19 and due to effective and swift measures in containing the disease, was one of the first countries in Europe to begin easing lockdown measures before Easter.​ Despite political turmoil in the country and looming controversy surrounding the embattled government of Prime Minister Andrej Babis, the country and its government adapted successfully to the onset of the crisis. While the Czech government’s actions saved it from the worst-case scenario from an epidemiological perspective, its economic prospects, following a sweeping two-month lockdown, may be largely out of its own hands.

Only 11 days after the first case of the disease was discovered in the country, Prime Minister Babis declared a state of emergency – the first in the current Czech Republic’s history – and only five days after a ‘shelter-in-place’ order was issued for all residents. This was seen as extreme at the time and many of Babis’ political detractors, particularly in the Milion Chvilek movement that drew the largest demonstration last year since the Velvet Revolution to oppose Babis, saw it as political opportunism to curtail civil liberties. But as healthcare systems across Europe collapsed, especially in Southern Europe, people realised the necessity of a government shutdown.

Policies that mandate the wearing of masks, social-distancing measures, and limits on crowd sizes among other policies proved to be effective in curtailing the spread of the disease. ​The state was using the state of emergency, both in its broad government power and legislative state of emergency, to swiftly implement successful policies learned from abroad.

At the same time, critical help from abroad –most importantly from China – helped the country to overcome shortages of key medical supplies and personal protective equipment. High-level Czech officials used their connections with China to establish an air bridge that began on March 20, and that delivered nearly 2,000 tonnes of much-needed supplies. These purchases were a game-changer for the country’s ability to test and develop an effective contact tracing process that is now being used to facilitate the process of reopening that Is currently underway.

As life returns to something like normal, an economic downswing is looming and the state has taken notice. In response to the lockdown which put the entire apparatus of government on hold, the state has raised its budget deficit twice – originally starting at 40 billion Czech crowns for 2020 (1.69 billion USD*), which was then raised several times and is now likely to peak at 500 billion Czech crowns (21.14 billion USD). This corresponds with a sweeping loss in revenue as well as a smorgasbord of government spending that has included interest free loans for businesses, cash stimulus for sole traders, increased unemployment insurance, and wage subsidies.

Before the crisis, the Czech Republic was on a path to stabilise and reduce its state debt, according to a Finance Ministry statement from late December​. The Ministry said that debt fell to 29.4 per cent of Gross Domestic Product (GDP) in 2019, which is the lowest value of the state debt to GDP ratio in the last ten years. This positioning gave the Czech Republic the highest total credit rating score of any Central and Eastern European country, as well as an above-average score compared to the Euro Area member states.

“Right now is a good time to use the fiscal space that we have created in recent years with budgetary responsibility. The Czech economy is strong, the state of our public finances is good, the banking sector is extremely healthy, the budgets of local governments have unprecedented reserves, and health insurance companies are doing well,” Finance Minister Alena Schillerova ​said when justifying the state’s first budget deficit expansion in March​.

The Czech Republic has also enjoyed widespread prosperity, sitting on one of the consistently lowest (usually around 3 per cent) ​unemployment rates in the European Union (EU).​ This has created corresponding wage growth and increasing consumer spending that has created modest growth in the country. At the same time, economists, including the board of the ​Czech National Bank (CNB)​ warned of this economic growth cooling in 2020 even in advance of the pandemic, and that no doubt has been compounded by the ongoing crisis.

The first signs of this was in April when the country’s automobile industry – the largest employer in the country and a huge proportion of its industry – reported a massive plunge in production in the month of March, ​falling by 36.2 per cent​ due to government restrictions placed on businesses to reduce the spread of Covid-19. Approximately 90 per cent of firms in the sector stopped or limited production from March. This has also had a significant knock-on impact on downstream parts of the industry, such as car dealerships.

On top of this, the average Czech had already been heavily affected. According to a ​study conducted by Fair Credit at the end of April​, over half of 880 respondents said that they are struggling to pay their monthly expenses. One in ten have to borrow money before payday and 43 per cent of people now live paycheck-to-paycheck, ​which is up from 28 per cent from before the pandemic.

According to data from May​, the Czech Republic’s six-year growth streak has already ended. In the first quarter of 2020 (Q1), GDP in the country fell by 2.2 per cent year-on-year, and declined 3.6 pe rcent compared to the previous quarter due to a decline in industry and services.

According to the Czech Statistical Office, there was a deterioration in the foreign trade balance and a decline in investment activity and household spending. While government spending did help to moderate the decline, the country’s central bank – which itself has greatly expanded its toolbox of financial instruments to manage the crisis – has warned that this alone will not save the economy.

The Czech National Bank published a grim forecast in response to these figures, saying that the ​country’s GDP in 2020 is expected to drop by nearly eight per cent​. They also predict that unemployment will rise significantly, which will slow wage growth for both 2020 and 2021. At the same time, ​preliminary data in June​ based on electricity consumption shows signs that the economy’s downturn may have bottomed out, but there is still little to celebrate.

For the month of April, industrial production figures and exports fell in a horrifying way. The Czech Republic’s industrial production dropped by nearly a third year-on-year during the month​, ​according to the Czech Statistical Office.​ This lack of activity created a 35.5 per cent dip in revenue. In addition to this data, according to ​preliminary data​, the balance of foreign trade in April ended in a 26.9 billion Czech crown deficit (1.14 billion USD) which was 42.9 billion crowns worse year-on-year (1.81 billion USD). The total loss in revenue was represented by a 41.7 per cent year-on-year fall. These dips, the office noted, only further compound drops that were already occurring before the pandemic hit.

Here lies the real problem the Czech Republic now faces in managing its own economic situation, namely a heavy reliance on industrial exports (especially automotive manufacturing), a heavy dependence on consumption from other EU member states (namely Germany that is itself falling into recession), and a reliance on foreign direct investment. There is also a lack of international tourism, and what exists is mainly centered around Prague, and will no doubt be hit by border restrictions, and is highly unlikely to rebound despite government efforts to promote domestic tourism. All of these factors leave little room for the Czech Republic to have much agency and influence regarding the economic situation the country now faces, and also highlights the pressing need for EU-level solutions to the challenges of the pandemic.

The Czech Republic, as well as the Visegrad Group/V4 (i.e. Hungary, the Czech Republic, Poland, and Slovakia) ​have already seen the need for a coordinated economic response​. According to the results of the last V4 summit under the Czech presidency that took place on June 11, the prime ministers proclaimed that the pandemic affected all EU member states, but not every country has the tools to manage it effectively. To this end, “these additional funds (the EU recovery fund) should be distributed fairly,” Prime Minister Babis said.

Babis reiterated during this summit that unemployment should not be the main criterion for allocating funds because these figures, if taken into account for the past several years, are irrelevant to the current economic crisis. Instead, Babis proposed using fluctuations in GDP as a key indicator – something that would no doubt benefit the Czech Republic given its relative prosperity until the onset of the crisis.

For the Czech Republic, and no doubt the rest of Europe, to fully conquer the current crisis economically, it will take a collaborative effort from the EU to help all of its member states given how interlinked their economies are. Specifically, the Czech Republic will suffer if a significant recession happens in other EU member states, particularly Germany, that drives down consumer spending on Czech exports. At the same time, this provides a serious opportunity for the EU itself, which has faced controversy over its initial response to the crisis, to intervene successfully and to promote cohesion.

*23.647 Czech Crowns = 1 USD (morning of June 18)