An assessment of the effect of the August floods on Czech economic growth

Although the August floods were an extraordinary event in terms of both scale and effect, their macroeconomic impacts, including on the fiscal side, will probably not be fundamental. According to a government report on the state budget performance in 2002 H1 submitted to the Chamber of Deputies at the start of November, the total damage caused to the national economy by the floods amounted to CZK 70 billion. The transport, energy and communications infrastructure was seriously hit. The worst-affected sectors were chemical, food, mining and energy industries. The analysis of the effects of the flooding involved a comprehensive examination of its impacts on economic growth, the labour market, inflation, the external balance and public finances. The experience of the 1997 floods was drawn upon as well.

The supply side should not be affected in the long run. The damage to production facilities and the temporary fall in sales is expected to bring about weaker growth of industrial production, particularly in 2002 Q3. In agriculture, the final effect of the flood damage should not be too serious, as the flooding only affected less significant agricultural areas at an advanced stage of harvesting. A short-term decrease in performance in Q3 is also likely in the service sector, and especially in transport, communications, retail trade and travel services. On the other hand, activities connected with the repair of property damaged by the floods should foster growth in construction output as early as 2002 H2. The negative effects of the floods on the demand side should be visible primarily in 2002 Q3. A temporary decline in domestic demand should manifest itself primarily in consumer demand. The expected weakening of industrial production growth caused by the floods will show up in lower stockbuilding in 2002 Q2 with negative effects on economic growth. At the same time we can expect a short-term decline in imports for final consumption and a drop in revenues from travel in the areas hit by the floods. As a result, 2002 H2 should see some deterioration in net exports. On the other hand, a rise is expected in public spending, particularly in 2002 Q3, in connection with rescue and clean-up operations (though part of its spending will be offset by a reduction in other planned spending on government consumption).

An increase in domestic demand is expected in 2003 in connection with transfers in the form of payment of insurance claims, one-off government subsidies and other transfers, and with repairs to damaged property and infrastructure. Compensation payments associated with foreign re-insurance of insurance companies are also expected. The higher inflow of transfers should provide a supplementary impulse to growth in household consumption. The additional investment demand associated with infrastructure renewal should boost growth in gross fixed capital formation.

The impact of the floods on the overall GDP growth in both 2002 and 2003 should be relatively weak. Drawing on preliminary considerations regarding demand-side developments and GDP expenditure, and taking into account the experience of the 1997 floods, we can expect the flooding to cause real GDP growth to slow by about 0.2-0.3 percentage points in 2002. In 2003, conversely, we can expect an additional positive impulse for GDP growth of about the same magnitude, as in 2002. The effect of the flooding on unemployment is not expected to be significant, although it could generate a slight rise in 2002 H2. Given the expected impact of the flooding on economic activity, the overall effect on consumer price inflation and industrial producer price inflation should be very small in both 2002 and 2003. Turning to public finances, a partial fall in revenues from both direct and indirect taxes (of around CZK 2 billion a year) can be expected in 2002 and 2003 alike.