Introduction: Insights from the OECD Economic Survey 2025
The OECD Economic Survey 2025 provides an in-depth analysis of Czechia’s economic landscape, focusing on key areas such as fiscal sustainability, economic growth, and innovation. The report highlights the country’s economic recovery, the need for structural reforms, and the importance of enhancing innovation and business dynamism. In this article, we will explore two crucial aspects of the survey: ensuring robust economic growth and fiscal sustainability, and boosting innovation to drive long-term competitiveness.
Ensuring Robust Growth and Fiscal Sustainability
Economic Recovery and Key Challenges
After stagnating in 2023 due to weak global demand and surging inflation, Czechia’s economy resumed moderate growth in late 2023 and continued into 2024. Household consumption, driven by real wage growth, has been the primary factor behind the economic recovery. However, investment and foreign demand remain subdued, slowing the full recovery of the export-driven economy.
High-frequency indicators suggest continued growth into early 2025, with GDP expanding by 0.5% in Q4 2024, fueled mainly by domestic demand. Despite a resilient automotive sector, slow external demand—especially from Germany—has weighed on industrial production and exports.
Inflation Stabilizing Close to Target
Inflation in Czechia has declined significantly, reaching the 2% target in early 2024 due to lower food, energy, and industrial producer prices, along with tight monetary policy. However, underlying inflationary pressures remain, and inflation edged up to 2.8% in January 2025, driven by volatile food prices and service sector wage growth. The Czech koruna depreciated slightly against the euro, exerting limited inflationary pressure.
Labor Market Remains Tight Despite Economic Cooling
Czechia’s unemployment rate remains one of the lowest in the OECD, although job vacancies have declined. Labor shortages persist, particularly in construction and skilled trades. The inflow of 380,000 Ukrainian refugees (3.5% of the population) has helped mitigate labor shortages, with 150,000 Ukrainian refugees employed—although many work in jobs below their qualification levels.
Wage Growth and Competitiveness
With a tight labor market and past high inflation, nominal wages remain high, leading to positive real wage growth since early 2024 after two years of decline. Meanwhile, unit labor cost growth has eased, improving Czechia’s cost competitiveness in recent quarters.
Monetary and Fiscal Policy Measures
Czechia’s monetary policy is gradually easing as inflation slows, but remains restrictive. Since December 2023, the Czech National Bank (CNB) has reduced the key policy rate from 7% to 3.75% as inflation approaches the 2% target. However, inflation expectations remain above target, particularly among households and non-financial corporations, which could influence future wage and price-setting behavior.
The CNB has signaled a cautious approach to further rate cuts, with projections suggesting a nominal short-term interest rate of around 3% by mid-2025. Despite easing conditions, wage growth and high service sector prices require a data-driven and forward-looking monetary policy stance to ensure inflation remains under control.
Koruna Depreciation and Exchange Rate Pressures
The interest rate differential between Czechia and the eurozone has narrowed, exerting depreciation pressure on the koruna. This trend has contributed to higher imported inflation, particularly in goods and services. While the CNB previously intervened in foreign exchange markets, it ceased direct interventions in August 2023, relying instead on a managed float policy. Future fluctuations in exchange rates could impact monetary policy decisions and price stability.
Banking Sector Resilience and Financial Stability Risks
The Czech banking sector remains strong, with solid profits, high capital reserves, and low non-performing loan ratios. However, certain vulnerabilities require close monitoring:
- Real Estate Market Exposure: Czech banks have significant exposure to property loans, with 63% of total bank loans linked to the real estate sector.
- Foreign Currency Loans: Over 50% of corporate loans are in foreign currency, mainly euros, increasing exchange rate volatility risks.
- Mortgage Market Risks: The share of riskier mortgage loans (with high debt-to-income ratios) has grown following the relaxation of macroprudential regulations.
The real estate market has stabilized after a price correction, but property values remain overvalued. While commercial real estate prices dropped 16% between 2022 and 2023, residential prices have started to rise again in 2024. The CNB continues to assess potential market imbalances and may reactivate lending restrictions if risks increase.
Structural Reforms and Tax Policy Adjustments
To address long-term financial stability concerns, the OECD recommends:
- Streamlining construction permit processes to increase housing supply and ease market imbalances.
- Tax reforms, including higher recurrent property taxes based on updated market values, to reduce price fluctuations and improve housing market efficiency.
- Strengthening corporate lending regulations to mitigate risks linked to the high share of foreign currency loans.
Fiscal Consolidation to Reduce Debt
After a significant rise in public debt (42% of GDP in 2023) due to pandemic relief and tax cuts, Czechia has launched a fiscal consolidation plan to stabilize public finances. Key measures include:
- Reducing the budget deficit below 3% of GDP in 2024, mainly by ending energy support.
- Increasing tax revenues (1.2% of GDP) through higher corporate taxes, social security contributions, and real estate taxes.
- Containing public sector wages while maintaining defense and pension spending.
Long-Term Challenges: Aging Population & Green Transition
Czechia faces rising pension and healthcare costs, which could push public debt to 100% of GDP by 2050. Pension reforms and structural adjustments could limit debt growth to 70% of GDP and ensure fiscal sustainability.
Reforms and EU Support for Fiscal Stability
To maintain growth-friendly fiscal policies, the OECD suggests:
- Shifting taxes from labor to property and environmental taxes.
- Enhancing spending efficiency through performance-based budgeting and social benefit reforms.
- Utilizing EU funds (€30+ billion) for green and social transitions.
Conclusion: A Sustainable Path Forward
Czechia stands at a crucial juncture where balanced economic policies, structural reforms, and strategic investments will determine its long-term success. The nation’s focus on fiscal sustainability, innovation, and business dynamism is essential to strengthen economic resilience while ensuring stable growth.
By addressing labor shortages, enhancing productivity, and leveraging EU funds for modernization, Czechia can mitigate economic risks and remain competitive in the global market. The gradual easing of monetary policy, combined with responsible fiscal management, will be key to ensuring stable inflation and economic expansion.
With the right mix of innovation-driven policies, fiscal discipline, and business-friendly reforms, Czechia has the potential to become one of Central Europe’s most dynamic economies in the years ahead.
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Sources: Czechia must ensure fiscal sustainability and boost skills, innovation and business dynamism to drive growth, says OECD; OECD Economic Surveys: Czechia 2025 | OECD
