Czechia (Czech Republic)

Recovery in growth underpinned by a rebound in household consumption

After zero growth in 2023, the economy began to rebound in 2024. The trend is likely to continue in 2025, mainly supported by the recovery in household consumption. The recovery is being helped by falling inflation and rising wages in a tight labour market, leading to an increase in purchasing power and real wages after two years of decline. In response, the Czech National Bank (CNB) cut its key rate by 250 basis points between December 2023 and August 2024 to 4.5%. Inflation is expected to remain within the CNB's target range (2% ± 1%), which should allow monetary easing to continue.

Public spending is expected to continue being the growth driver in 2024 and 2025. It will focus on the defence sector, with the purchase of 24 American F-35 fighter jets worth 150 billion kroner. The cost of pensions on back of indexation to inflation and the cost of debt servicing will also rise. Investment, meanwhile, is expected to decline in 2024, before picking up again in 2025, driven by foreign direct investment (FDI) as part of the relocation of European companies and the installation of Chinese companies with a view to the development of electric vehicles. The EU's Recovery and Resilience Facility (RRF), endowed with EUR 9 billion until 2026, will remain a key pillar to support the transition to a low-carbon economy, digital transformation, the improvement in the quality of public administration and strengthen healthcare. The REPowerEU component, added in October 2023, aims to reduce the country's dependence on fossil fuels. The Czech Republic plans to stop importing Russian oil (making up 58% of oil imports) by mid-2025, with the extension of the transalpine oil pipeline (TAL) linking it to Germany. Another objective is to stop using coal by 2033, although this is likely to be delayed. The country is also planning to extend the Dukovany nuclear power plant with the construction of four new reactors. The Korean company KHNP won the tender for this project in July 2024.

Exports should pick up modestly in 2024 before possibly accelerating in 2025 if their main European manufacturing markets pick up. The performance of German industry, particularly the automotive sector, whose activity is currently moderate, will be decisive. At the same time, imports should also increase in 2024 due to the recovery in household consumption and again in 2025, in line with the expected rise in investment, particularly to meet increased demand for capital goods and industrial know-how. Despite this increase in imports, trade should make a positive contribution to growth. The transition to electric vehicles represents a major challenge for the local automotive industry which specialises in internal combustion engine vehicles. Substantial investment and significant retraining of the workforce will be required. Chinese carmakers, anxious to get around the new countervailing customs duties introduced by the EU in July 2024 (up to 37.6%, in addition to a 10% tax), will be looking to develop a presence in Central Europe, albeit not necessarily in the Czech Republic. However, in May 2024, Nobo Automotive, a subsidiary of Chinese light truck manufacturer Great Wall Motor, opened a new plant in ?eské Bud?jovice, intended to supply car seats for German carmaker BMW.

Budget consolidation and deletion of current surplus

The public deficit should fall in 2024 and 2025 thanks to the consolidation program budget. This program includes a number of tax measures, such as increasing the corporate tax rate from 19% to 21%, reintroducing the 0.6% health insurance contribution payable by employers, the doubling of property tax, and the increase in excise duty on alcohol, tobacco and gambling. The measures designed to mitigate the impact of high energy prices on households will be phased out by the end of 2024. Finally, Czech public debt (of which 27% is external and 11% is denominated in foreign currencies) remains low compared to the EU average.

The current account surplus should almost disappear in 2024 due to the increase in imports generated by the domestic recovery, which will reduce the trade surplus. By 2025, a recovery, albeit modest, in exports and the strengthening of the surplus on services associated with the recovery in tourism and the solid performance of information and communication technologies (ICTs) will offset the rise in imports of equipment and industrial know-how related to the expected recovery in investment. However, the increase in profits repatriated by foreign companies on back of the recovery will bite back into the current surplus a little more.

Decline in popularity of the coalition government in the run-up to the general election in 2025

The country is governed by a coalition of five parties, led by Petr Fiala, President of the government and leader of the Civic Democratic Party (ODS), a liberal-conservative party. The ODS, an ally of the Christian Democratic Union-Czechoslovak People's Party (KDU-CSL) and Top 09 within the Spolu coalition, has formed an alliance with the progressive Pirate party and the centrist Mayors party. Together, they control 108 of the 200 seats in the Lower House. The opposition is made up of the populist ANO party, led by the still very influential former prime minister Andrej Babis, which holds 72 seats, and the radical right-wing Freedom and Direct Democracy party (SPD), with 20 seats. The next general election is scheduled for October 2025. The government's popularity has fallen since 2023 as a result of fiscal austerity measures and the rising cost of living. In this context, the ANO is gaining in popularity, but the chances of it obtaining a majority without the support of the far right are slim. In the European elections of June 2024, the ANO won the most seats with 26% of the vote. The Spolu coalition came second with just over 22% of the vote. In total, the parties in the government coalition won the support of around 37% of the electorate.

Since the beginning of the invasion of Ukraine by Russia, the Czech Republic has been heavily involved in supporting Kiev, welcoming refugees and providing humanitarian and military aid. Aid has already reached USD 1.4 billion dollars or around 0.5% of GDP. Moreover, in response to the war, the Czech Republic has considerably increased its defence spending, which should reach the NATO target of 2% of GDP by 2024.

In January 2024, President Petr Pavel renewed his call to join the euro area, underlining the advantages for a country with a strong focus on foreign trade with the EU. However, it is unlikely to become a member in the foreseeable future as the government coalition remains divided on the issue, with most parties in favour, with the notable exception of Prime Minister Petr Fiala and his ODS party. Over 70% of the population is opposed to joining the euro area, fearing higher prices. In its 2024 convergence report, the European Commission noted that not all membership criteria had been met.

Payment

Czech law limits cash payments to a maximum of CZK 270,000 (approximately EUR 10,000). Purchasers who wish to make payments that exceed this limit must pay the entire sum via wire or bank transfer. Bank transfers are by far the most widely-used means of payment. The SWIFT system is fully operable in the Czechia, and provides an easier, quicker and cheaper method for handling international payments. The Czechia is part of the SEPA system, simplifying bank transfers inside the European region

Cheques for domestic transactions are not widely used. Bills of exchange and promissory notes are commonly used as a security instrument, which present the purchaser with the option to access a fast-track procedure for ordering payment by court (under certain legal conditions). Electronic invoices are widely accepted.

Debt Collection

To ensure the recovery of a debt in case of default, creditors should keep all documentation related to the transaction. This includes the original (written) contract, any documents related to the transaction (e.g. invoices and confirmed delivery notes), individual orders, and any other relevant documentation and/or correspondence. The main factors influencing effectiveness in debt collection are the age of the debt (the earlier the start of collection, the larger the chance for a successful recovery) and the reason for non-payment.

Amicable phase

Amicable debt collection is recommended, because it remains cheaper for creditor compared to legal proceedings. Amicable settlements are also enforceable in court.

Legal proceedings

Fast-track procedure / Order to pay

Platební rozkaz is a practical and rather short procedure, outlined in sections 172-175 of the Code of Civil Procedure (ob?anský soudní ?ád, CCP). The judge, convinced of the merits of the claim and without hearing the case, issues a payment order which is served to the defendant, who may either accept it or file a statement of opposition against it within fifteen days of its service. If the debtor opposes the debt, then the process continues as standard court proceedings.

If the legal action duly described and substantiated the creditor’s claim, the court can issue an order to pay, even if the creditor has not requested such an order. It takes on average three months for a decision to be made, ranging from a minimum of two months to a maximum of six months.

Ordinary procedure

Ordinary proceedings takes place after the defendant has disputed the claim during the platební rozkaz or by filing a dispute directly via the courts. Ordinary proceedings are partly in writing (parties filing submissions accompanied by all supporting case documents), and partly oral (both creditors and debtors present their cases during the main hearing). In practice, ordinary proceedings typically last from one to three years before the court renders a final and enforceable judgement.

On July 1, 2009 (Act No. 7/2009 Coll.), the CCP was amended to introduce more digital options in the justice process, so as to lessen the burden of judges and ensure the prevention of delays in proceedings. Since this amendment, all correspondence from Czech authorities to legal entities is delivered electronically via registered data boxes with special legal regulations (Act No. 300/2008 Coll., effective as of July 1, 2009).

Enforcement of a Legal Decision

Judicial enforcement is reserved only for matters specifically listed in the law. Monetary claims stemming from business relationships are enforced by a judicial executor (soudní executor) under Act No. 120/2001 Coll. (exeku?ní ?ád, the Execution Act). Enforcement by judicial executor is considered to be more effective, because the executor is a private-sector entity whose fees depend on a successful enforcement. A specific fees schedule applies based on the amount concerned by the execution.

As part of the EU, enforcement of foreign awards issued by an EU member state will benefit from advantageous enforcement conditions, such as the EU Payment Order or the European Small Claims procedure. Foreign awards rendered by non-EU countries can be recognized and enforced, provided that they have gone through the exequatur procedure under the Czech Private International Law and Procedure Act.

Insolvency Proceedings

An insolvency petition can be lodged by either debtors themselves or their creditors, but a creditor must provide unambiguous evidence to support its claim, with one of the following:

an acknowledgement of debt (with the certified signature of the debtor or its representative);

an enforceable judgement;

an enforceable notary act;

an enforceable executor´s act;

The creditor must in addition prove the existence of other creditors. Creditors are liable for damages caused by filing a bankruptcy petition where the conditions of insolvency were not met.

All insolvency petitions are recorded in an insolvency register (insolven?ní rejst?ík) kept by the Ministry of Justice, where all important information on insolvency proceedings is published. This also allows for insolvency proceedings to remain transparent.

The insolvency act introduces new methods and faster process, with single proceedings where the court decides on three particular solutions:

REORGANIZATION

Reorganization is a method of resolving insolvency that aims to preserve the debtor’s business, while granting satisfaction to creditors. Insolvent debtors may initiate proceedings, but debt restructuration proposals must be approved by the court, with periodical inspection of its fulfilment by the creditors. The management retains the right to manage the business.

BANKRUPTCY

Bankruptcy is a court-ordered method of resolving insolvency, whose aim is to monetize all assets of debtor and thus obtained yield to distribute between creditors who have lodged their claims into the proceedings. The authorization to dispose of debtor´s assets and to sell those assets is granted to a bankruptcy trustee who is appointed by court. At this point; the business declared bankrupt is no longer allowed to conduct business operations independently.

DEBT CLEARANCE

Used mainly by individuals (non-entrepreneurs), this is a method of resolving insolvency which presents an alternative to declaring bankruptcy. The Insolvent debtor clears the debt, but under Court control he is obliged to pay only a reduced percentage of total debts.

LIQUIDATION

The liquidation procedure begins once it is decided that a company is to be wound up. Either the management or the court appoints a liquidator in charge of liquidating the company’s assets and collecting receivables. Creditors must register their claims within 90 days following publication of the court’s decision, in order to get satisfaction during the liquidation proceedings. All claims of creditors must be fully satisfied in liquidation proceedings. It is important to note that liquidation proceedings are not considered as a method of insolvency in Czech law: in the event that the liquidator finds there are not enough assets to satisfy all claims during liquidation, he is obliged to file a petition for insolvency. At this point, the liquidation turns into insolvency; a separate proceeding.

Last updated: August 2024