Investors in the markets believe that governments are doing big things to restart the economy. And partially, they are right. Public finance deficits in the largest European economies, similarly to the Czech Republic, may reach around 10% of GDP this year. The problem is that behind much of the deficit there will be the net drop in tax revenue or measures to keep the temporarily “unemployed employees” at work – i.e. a smarter form of unemployment benefit. This does not mean that these measures do not count. On the contrary, they are very important - it is right that the state prevents massive redundancies, covers liquidity shortfalls in the business sector and continues to spend funds as if there were no revenue gaps. One just shouldn't understand today's deficit as a big "bazooka" massively restarting demand, but rather as a large "patch", preventing massive self-destruction of the demand.
That's why it will become more and more important to monitor not only the "patches", but also smart stimulation of new demand in defrosting economies. In the case of small open economies such as the Czech Republic, this is not only about us, but also about how our neighbors cope. The good news is that Germany adopted budget packages last month aimed at supporting domestic demand (exceeding EUR 100 billion). The bad news is that the package focuses more on consumption (via temporary tax cuts) than on investment. Our analyses show that increased German investment helps the Czech Republic more significantly than increased German consumption. And it is important to realize that it is the restart of demand in the rest of Central Europe that will help Czech producers even more - every euro invested in Slovakia, Poland or in Hungary will be reflected in the production in the Czech Republic even more than the euro spent in Germany. This only underlines the well-known fact that the Czech Republic critically depends on the smooth functioning of the European Single Market, primarily with the closest neighbors.
Source: Československá obchodní banka
13th May 2020