MONETARY POLICY REPORT | WINTER 2025 (box 1)
(author: Matěj Šarboch)
As a small open economy, the Czech Republic has strong economic ties with the external environment. The Czech economy’s growth model is characterised by a high share of industry, which exports much of its output. This results in high trade surpluses. Czech exports have always been highly dependent on demand from foreign trading partners, especially euro area countries. However, they have not been faring too well overall over the past year and a half or so. This is especially true of Germany, which accounts for the largest share of external demand and thus has the biggest weight in the effective euro area indicator.[1] This has been reflected in subdued growth in Czech exports, although not to the full extent, as they have been kept afloat by exports to countries outside the euro area (see Chart 1). Czech firms have been able to find new markets for their goods and services. This has partly lessened the impact of the downturn in our largest trading partner’s economy.[2] This box describes how and when the Czech export structure changed, which countries Czech exports go to, and how much the link between exports and euro area demand is changing.
Chart 1 – Export growth has recently been driven mainly by exports to non-euro area countries
y-o-y percentage changes; contributions in percentage points; prices of 2020 (chain-linked); seasonally adjusted
Note: The year-on-year changes in exports in 2020–2021 range between −26% and 34%. However, the y-axis has been narrowed for reasons of presentation.
Czech exports grew by 4% in 2024 Q3, well above the pace expected by the CNB’s autumn forecast (2.3%). Given that the forecast for effective euro area growth broadly materialised, this came as a surprise. A closer inspection (see Chart 1) reveals that exports to non-EU countries dominated last year, with exports to non-euro area EU countries also contributing significantly in the second half of the year. Exports to euro area countries recovered only slightly. The contribution of non-euro area countries[3] to export growth was also significant in the past, but the contribution of the euro area was usually several times bigger. In 2024 Q3, however, the contribution of non-euro area countries was above the average, despite a recovery in exports to the euro area. The share of exports to non-euro area EU countries has been growing gradually for some time now (see Chart 2).[4] By contrast, the share of exports to non-EU countries was broadly flat at around 24.5% from 2012 until the beginning of 2022. It declined temporarily to 23% in the first half of 2022 (probably due to the start of Russia’s aggression against Ukraine), but then increased relatively sharply, exceeding 26% in 2024 Q3.
Chart 2 – The share of exports to non-euro area EU countries has long been growing gradually; that to non-EU countries has risen sharply in the past two years
share of each territory in total exports in %; prices of 2020 (chain-linked); seasonally adjusted
On looking more closely at the destinations for exported Czech goods,[5] we find that exports to Russia (quite understandably) recorded the largest change compared to 2019 (see Chart 3). Before 2022, just over 2% of exported Czech goods went to Russia, but mutual trade almost halted after the war in Ukraine started. The share of exports to euro area countries has also been falling (with marked declines also being recorded for the shares of exports to three countries in the effective euro area), most of all in the case of Germany. The drop in exports to Germany in recent years can be explained mostly by weak demand, but it is also structural in nature. The share of exports to Germany has been dropping sharply since 2015. This corresponds to the observation in a box in the Summer 2024 MPR[6] that the Czech Republic’s market share in German imports has been falling since around 2016. This share rose sharply again in 2023, but this offset the previous fall only partially. By contrast, Poland was able to increase its share in German imports even between 2016 and 2023 and was thus the likely cause of part of the loss of Czech market share. Poland’s share in Czech exports has also increased the most in recent years (see Chart 3). The only other euro area country whose share has risen is Italy. The other cases are non-euro area countries such as the USA, the UK and Turkey. However, it is quite likely that Turkey re-exports part of Czech imports to Russia.[7]
Chart 3 – More and more Czech exports are going to non-euro area countries, while Germany’s share is falling
difference in average share of goods exports to given country in total exports in January–November 2024 compared to same period of 2019 and 2015; current prices; seasonally unadjusted
The weakening link between Czech exports and effective euro area demand is illustrated by the regression coefficient (see Chart 4).[8] It started to rise sharply in 2004 after the Czech Republic joined the EU. This period was characterised by brisk economic growth due primarily to high trade surpluses, reflecting a boom in the free movement of people, goods, services and capital. The coefficient then started to decrease. This trend stalled while the exchange rate commitment was in place. Around 2016, slowing potential output growth,[9] and also the fact that Czech industry had almost stopped growing, started to foster slower growth in exports to the euro area. Since 2021, the coefficient has been around 2, meaning that year-on-year Czech export growth is only around double the growth in effective euro area demand.
Chart 4 – The previously strong link between Czech exports and effective euro area demand has been weakening
elasticity of y-o-y Czech export growth to y-o-y GDP growth in effective euro area; coefficient from regression model with no constant; CNB calculation
Note: The coefficient is taken from a regression containing data from a rolling time window of 16 quarters.
Besides the already observed fact that the share of non-euro area countries in Czech exports has been rising, account must also be taken of the fact that the trading partners whose shares in Czech exports have increased (such as the USA) are expected to perform better than the effective euro area countries in the next few quarters. However, the impacts on global trade of the tariff policy announced by the USA remain an uncertainty. The free trade agreement recently agreed between the EU and the South American Mercosur bloc may also have a positive effect. If effective euro area growth (driven mainly by the lacklustre performance of Germany) remains subdued and Czech firms increasingly focus on non-euro area countries, the export growth forecasts (defined as roughly double the year-on-year economic growth rate in the effective euro area) may be underestimated. For all these reasons, the current forecast contained in the 2025 Winter MPR includes an expert adjustment that raises the path of exports this year above that implied by effective euro area demand alone. The changes in the foreign trade structure will be analysed further and reflected in future forecasts.
[1] The CNB forecast uses the concept of the effective euro area, which proxies for the external environment. This indicator contains the Czech Republic’s six major trading partners in the euro area (Germany, Slovakia, France, Italy, Austria, and Spain) and thus covers more than half of Czech exports. The Czech Republic’s largest trading partner is Germany, which is the destination for around 30% of its total goods exports, followed by Slovakia with a share of almost 10% and Poland with around 7%.
[2] One well-known bon mot has it that “if Germany sneezes, the Czech Republic catches a cold”. This has not applied in recent quarters, as Germany has been roughly stagnant while the Czech economy is now growing.
[3] i.e. the EU countries not using the euro and countries outside the EU.
[4] National accounts data, in which total exports are divided into exports to euro area countries, exports to non-euro area EU countries and exports to non-EU countries, are used in this calculation and in the decomposition in Chart 1. The data are available from 2011.
[5] This part uses monthly statistics on foreign trade in goods. The data are available from January 2015.
[6] See the box The position of Czech exporters on the German market by comparison with Poland in the Summer 2024 MPR.
[7] For details, see Drahozalová A., Kábrt M., Wałoszková A.: Vojensky i ekonomicky strategické výrobky nejspíše nadále nacházejí cestu z ČR do Ruska (Military and economically critical goods are probably still finding their way from the Czech Republic to Russia, in Czech only), cnBlog, 2024.
[8] The analysis focuses only on the short-term relationship between Czech exports and foreign economic activity and may thus differ from the longer-term and more structural dependence identified in the g3+ core forecasting model.
[9] See the appendix The slowdown in the long-term potential growth of the Czech economy in the Summer 2024 MPR.