Direct impacts of the Covid-19 pandemic on the Czech economy
(authors: Róbert Ambriško, Jaromír Gec, Ondřej Michálek, Jan Šolc)
The Czech Republic – like the rest of the world – is facing the coronavirus pandemic. The government has responded by introducing measures that have temporarily frozen economic activity in some sectors. This has been amplified by the spontaneous decisions of some firms to temporarily suspend production. This box complements box on the impacts of the pandemic in the Czech Republic’s main trading partner countries by summarising the measures taken locally and estimating their direct impact on the domestic economy.
In mid-March, the government declared a state of emergency and took a number of measures to curb the pandemic. Schools, restaurants, hotels, service providers and most shops[1] were gradually closed and all mass events cancelled. The national borders were closed to passenger transport at the same time. At company level, decisions were made to temporarily suspend or significantly cut production in the Czech automotive industry and other industrial sectors. The measures have affected about 40% of the Czech economy overall and will cause total economic activity to decline in 2020 Q1 and especially in 2020 Q2. The drop in output will occur mainly in services and industry. In Q2, however, it will also affect construction, primarily due to restrictions on the movement of foreign nationals (see Chart 1).
Chart 1 (BOX) Direct impact of the measures on gross value added
The measures will have the strongest effect on services, especially tourism
(index; unrestricted operation = 100)
Note: The return to 100 in 2020 Q3 means a return to operation unrestricted by the quarantine measures of the government and firms, not to the pre-coronavirus output level.
As regards the expenditure components of GDP, household consumption, exports and investment will be hit hardest in H1. Symmetric input-output tables are used to calculate the impact of the decline in gross value added in the sectors under consideration on the expenditure components of GDP. In Q1, according to the estimate, declines were recorded mainly by household consumption and exports (see Table 1). This reflects developments in other services, wholesale and retail trade, and tourism. In Q2, more capital-intensive sectors (industry and construction) will be affected to a greater extent as well. This will lead to a substantial decline in investment. In Q3, the lifting of the measures of the government and firms will help revive growth in these expenditure components.
Table 1 (BOX) Direct impacts of the measures on the components of GDP
The measures taken will substantially dampen economic activity in 2020 H1
(impacts in percentage points on quarterly GDP growth; constant prices)
| 1Q20 | 2Q20 | 3Q20 | |
|---|---|---|---|
| Household consumption | -2.8 | -4.6 | 7.8 |
| Gross fixed capital formation | -1.4 | -4.9 | 6.9 |
| Exports | -1.7 | -3.8 | 6.2 |
The government is dampening the negative impact on firms and the labour market using measures to support the economy and maintain liquidity. The government measures are having major budgetary impacts. They include an employment protection programme (Antivirus),[2] assistance for the self-employed[3] and payment of an attendance allowance[4] after schools were closed. In 2021, legal entities and individuals will be able to recover this year’s tax loss against taxes paid for 2018 and 2019 (“loss carryback”).[5] This is expected to boost private investment and household consumption. The coronavirus-related fiscal measures included in the forecast[6] amount to 2% of GDP in 2020 and 0.4% of GDP in 2021 (see Table 2). On top of this, further programmes have been introduced that have no immediate impact on the budget but do affect the liquidity situation of firms and the consumption of households, such as a moratorium on loan payments and guarantees for corporate loans.[7]
Table 2 (BOX) Fiscal measures to support the economy and maintain liquidity
The volume of fiscal stabilisation measures will be exceptionally high this year
(% of nominal GDP)
| 2020 | 2021 | |
|---|---|---|
| Extension and increase in attendance allowance | 0,3 | 0,0 |
| Wage subsidies for companies (Kurzarbeit) | 0,7 | 0,0 |
| Cancelling of social and health contributions for self-employed | 0,4 | 0,0 |
| One-off benefit for self-employed (25k Programme) | 0,4 | 0,0 |
| Increase in health care and emergency services expenditure | 0,2 | 0,0 |
| "Loss carryback" – recoverable tax loss | 0,0 | 0,4 |
| Total | 2,0 | 0,4 |
The current situation will also be reflected in the components of inflation. On the one hand, food prices will go up, mainly due to higher transport costs and shortages of seasonal agricultural workers in Europe. On the other hand, prices of services will dampen inflation during the spring and summer months. Given the expected sustained downturn in international tourism, this will not be fully offset later this year. Lower inflation will also be fostered by a decline in fuel prices linked with the fall in crude oil prices, which to some extent also reflects the global economic contraction caused by the coronavirus pandemic.
The Czech government started to ease some of its quarantine measures in April. Selected shops were gradually reopened. Based on the epidemiological situation, most of the original measures were expected to be relaxed in five stages by 8 June[8] (the restrictions relating to the cross-border movement of persons, schools and mass cultural, sports and social events are likely to stay in place longer). This will lead to a gradual recovery of the Czech economy in 2020 H2. The forecast assumes that the government restrictions will have been fully lifted by Q3, with the exception of tourism-related sectors, which will be affected for longer.
The coronavirus pandemic will also have an indirect effect on economic activity. Despite the government support measures, the labour market situation will worsen quite considerably, due largely to adverse developments abroad. The general unemployment rate will rise significantly and the previously very tight labour market will cool down. Both business and consumer sentiment will meanwhile deteriorate considerably.
[1] Except for food retailers, pharmacies, drugstores and some others.
[2] This involves a wage subsidy graded according to the reason for introducing Kurzarbeit (such as insufficient demand, input shortages and business closures due to government resolutions).
[3] This involves the cancellation of minimum social and health insurance contributions for the self-employed and the payment of a one-off benefit (the 25k Programme).
[4] Unlike the other compensation programmes, neither the attendance allowance nor the wage subsidy for quarantined individuals will be included in the average wage statistics, so wage growth will drop significantly and subsequently become volatile next year. This will be amplified by cases where employers reimburse wages only partially.
[5] The approval of this measure is uncertain. Although it was announced by the Ministry of Finance in “Liberation Package II”, a draft legal amendment has yet to be submitted at a government meeting.
[6] The forecast includes the measures known as of 21 April. However, take-up of some of them is currently rather lower than the government assumed.
[7] The indirect support includes government guarantees for preferential loans to firms ranging from several tens to hundreds of billions of koruna (COVID programmes). The potential future payment of these guarantees represents a risk of worse public finance performance than previously expected.
[8] According to the updated version of the government's plan for the gradual easing of quarantine measures from the end of April, most restrictions should be lifted as early as 25 May.
