The IMF improved its GDP growth forecasts for 2018 and 2019, by 0.2pps each, according to the concluding statement from Article IV consultations. The IMF’s projections are now very much in line with those of the government, at 3.7% in 2018 and 3.2% in 2019 (the latest government forecasts are at 3.6% in 2018 and 3.3% in 2019), though still lower than those of the CNB (at 3.9% in 2018 and 3.4% in 2019). The IMF assessed positively the state of Czech economy, arguing there are no strong imbalances. However, maintaining that stable growth is likely to be a challenge, especially given an ageing population and a labor market that increasingly needs more skilled workers. As far as solid wage growth is concerned, the IMF isn’t that worried, arguing that it is a natural consequence of strong labor demand.
The IMF was appreciative of how monetary policy has been led, saying that the CNB’s careful position was adequate in the current outlook, when uncertainty about global demand is rising. It suggested that the CNB should declare clearly its readiness to intervene when it needs to, something we doubt is going to be an issue. Yet, the IMF was also cautious about possible restrictions on global trade, which may exert downward pressure on the Czech economy. Nevertheless, this may also lead to easing inflationary pressure from import prices, further helped by a relatively appreciation of the national currency.
Areas that need improvement are financial sector regulation, particularly better advance monitoring of financial institutions. The IMF recommended that the CNB should receive full control over LTV, DTI and DSTI ratios, as a number of European banks have already be given such tools. It outlined that that risks to borrowers need to be monitored, particularly with mortgage lending, which has flourished recently in the Czech Republic. While the IMF acknowledges that it is due to wage growth and a favorable household sentiment, it recommends further safeguards against households borrowing beyond their means.
Finally, as far fiscal policy is concerned, the IMF recommended better spending criteria, particularly for public investment. While there are no threats to the current fiscal position, which the IMF sees as solid, it turned attention to medium- and long-term sustainability. An ageing population is going to put pressure on the pension system on one hand; growing wealth is going to reduce net EU funding on the other. The government needs to take measures, particularly on structural reforms, in order to allow deterioration of fiscal indicators in the long run. The IMF didn’t particularly pay attention to the spending increase last year, arguing it was mostly related to boosting productivity. However, it noted that more attention should be given to how effective public spending is. It recommended a reduction of taxes on labor, in order to relieve pressure on employers, who are already pressed to pay higher salaries due to labor shortages. Property taxes remain very low, while subsidies remained focused on large manufacturing term, and the IMF feels their scope may be expanded.