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Successfully investing in the Czech Republic

last updated on 7 June 2024 | reading time approx. 5 minutes

How do you assess the current economic situation in the Czech Republic? »
How would you describe the investment climate in the Czech Republic? Which sectors offer the largest potential? »
What challenges do German companies face during their business ventures into the Czech Republic? »
How does the Czech Republic address the shortage of skilled workers? »
In your opinion, how will the Czech Republic develop? »

How do you assess the current economic situation in the Czech Republic?

Unfortunately, the Czech economy was unable to recover in 2023 as originally expected and closed -0.3 percent weaker than the previous year.^[1] In the current environment, however, growth of around 1.4 percent is expected again in 2024 compared to the previous year.^[2]

Overall, the current economic situation in the Czech Republic (hereinafter also referred to as the “Czechia”) is solid, even though the local economy is still struggling with high energy costs, a shortage of skilled labour and geopolitical uncertainties.

In addition, the Czech Republic's great dependence on the German market is making itself felt. Germany was and still is by far the Czech Republic's most important foreign trade partner, followed by the Slovak Republic and Poland.^[3] In recent years, the Czech Republic has exported around a third of its goods to Germany.^[4]

The weakening German economy is therefore also having a noticeable impact on the Czech Republic, resulting in a slightly lesser demand for goods and services.

The significant appreciation of the Czech crown against the euro last year has exacerbated this situation.^[5] Recently, however, the Czech National Bank has contributed to levelling the exchange rate of the Czech crown again by lowering the key interest rate three times in a row. The CZK currently hovers around 25.025 and the key interest rate is set at 5.25 percent.^[6]

These measures are providing the Czech economy with a certain degree of relief. The further development of the economic situation will depend on how the economic framework conditions, energy policy, the shortage of skilled labour and, last but not least, demand from the main export market, Germany, develop.

How would you describe the investment climate in the Czech Republic? Which sectors offer the largest potential?

The factors decisive for an investment in the Czech Republic are currently viewed somewhat more critically than in previous years. Investors can continue to build on many positive framework conditions – in particular the geographical location, EU membership, the good level of telecommunication development, a stable energy supply, a high level of employee training and a reliable level of legal certainty.

However, investors are somewhat uneasy about the cost pressure on energy, wages and raw materials. The declining productivity and motivation of employees and the current increase in administrative costs due to the extending compliance obligations and documentation requirements are also seen as problematic.^[7]

The attractiveness of the Czech Republic as an investment location has therefore slightly dropped as visible from the respective rankings in recent years, particularly for new foreign investors.

However, the geographical location with good connections to neighbouring countries remains a strong positive aspect and, according to the plans of the Czech government, this infrastructure is to be further expanded. According to the government's plans, this area will be one of its central development objectives in the coming years. It is therefore assumed that the logistics sector in particular will have further potential in the Czech Republic.

All in all, these circumstances contribute to an overall cautiously optimistic mood. Many foreign companies already based in the Czech Republic are planning to expand their investments even further in the coming years. 45 percent of companies want to invest in the expansion of their production, 19 percent in research and development and 9 percent plan to expand their logistics capacities.^[8]

Another plus point is the generally stable political situation. The coalition around Prime Minister Petr Fiala is experiencing little friction in its activities. The new president elected last year, Petr Pavel, has also underpinned this stability.

The Czech Republic was and still is a good address when it comes to making investments in the Czech Republic, especially from German-speaking countries. It is still one of the top regions in Europe.

What challenges do German companies face during their business ventures into the Czech Republic?

The unemployment rate, which has been very low for years, is still one of the biggest challenges alongside geopolitical uncertainties. Last year, the unemployment rate was just 2.5 percent.^[9] This year in February it was 2.6 percent, which is still the lowest in the EU.^[10]

The years-long battle by employers to outbid in the attempt to attract skilled labour and a very high inflation rate (one of the highest in the EU) have also resulted in noticeable increases in wage costs.

We assume that these circumstances will ease somewhat. Inflation is currently back at just 2.7 percent^[11], not the least due to the aforementioned intervention by the Czech National Bank, which lowered the key interest rate several times in quick succession.^[12] The plan is to reduce the inflation rate even further, ideally allowing it to stabilize at around 2 percent.^[13] Further key interest rate cuts in 2024 are therefore not ruled out.

How does the Czech Republic address the shortage of skilled workers?

The shortage of skilled labour/professionals is indeed the Achilles heel of the Czech economy. The Czech government is trying to counteract the shortage of skilled labour with various measures, e.g. by creating incentives for workers from third countries in eastern border regions with the Czech Republic. Ukrainian workers have been able to enter into an employment relationship in the Czech Republic more easily since 2022 thanks to various legal simplifications.

However, according to widespread opinion in the business community, this problem is still not being given the necessary attention. The reform of the vocational school system, which has been debated for decades and is indeed urgently needed in the Czech Republic, is still pending.

In your opinion, how will the Czech Republic develop?

Leaving aside the current geopolitical uncertainties, the country is likely to remain at the top of the list of favourite European countries in Central and Eastern Europe as an investment location.

In principle, economic growth is expected to stabilize this year and a moderate upward trend can be expected. The economic outlook is described by experts as follows: “We can already see a faint light at the end of a long tunnel”.^[14]

We assume that the Czech government will endeavour to maintain a favourable business climate and try for even better conditions, if possible. It is currently trying to get a grip on the increase of public debt and the rise in total state expenditure with a new austerity package.

This highly ambitious package is intended to bring public finances into balance and relieve the state budget by 6 billion euros within two years. However, private households and companies will have to shoulder the costs. Among other things, VAT on selected product groups and income tax for companies and higher earners will be increased. The government expects the austerity package to reduce economic growth by 0.3 percentage points in the short term.^[15]

Due to digitalization and the ever-increasing use of AI, it is also to be expected that there will be a lasting change in the working and corporate environment as a whole. Topics such as further training, acceptance and the use of AI by employees, data security and data protection will become even more important, as will ESG, which is currently also becoming increasingly popular in the Czech Republic.

[1] See more: Wachstumsrate des realen BIP-Volumen

[2] See more f.e.: GTAI Germany Trade & Invest zur Tschechischen Republik, Status: Dezember 2023

[3] See more f.e.: GTAI Germany Trade & Invest zur Tschechischen Republik, Status: Dezember 2023

[4] See more: Deutschland ist begehrter Handelspartner

[5] See more: In May 2023, the exchange rate of the Czech koruna against the euro was 23.5:1

[6] See more: Stand 3/5/24

[7] See more: AHK Czech Republic, Economic Survey 2024, press release

[8] See more: Tschechiens Wachstum steht auf wackeligen Beinen

[9] See more: Employment, Unemployment (CZSO)

[10] See more: EU-weite Erwerbslosigkeit liegt März 2024 bei 6,0%

[11] See more: Inflation, Consumer Prices (CZSO)

[12] See already above, No. 6