Czech economy: first year after the EU entry

2004, which was also the year of EU entry, was quite successful for the Czech economy. Economic growth accelerated, driven in particular by the investment demand and exports. After 10 years of permanent deficits, the trade balance deficit diminished significantly. The effects of EU entry, which opened new chances to the exporters, accompanied the positive impact of FDI inflows from the past. Due to acceleration of exports, industrial output registered a record high growth within the last decade. Accelerating economic growth did not provoke inflationary pressures. Two waves of VAT increase (in January and May) were absorbed until the end of the year. A strong increase in PPI resulting from high world prices of oil and gas had no spillover effect to consumer prices due to strong competition between both the producers and traders. At the beginning of 2005, economic growth continued with the same pace as in 2004, driven by investment demand and exports. Consumer demand kept on weakening, consumption of households registered the weakest growth since the end of 1998. Both the industrial production and exports reported a slowdown due to sluggish economic activity in the euro area, especially in Germany.

Keywords: monetary policy, inflation, balance of payments, investment and consumer demand, trade balance