Czechia's economic ranking drops in new Prosperity Index

Despite its faltering finances, Czechia's economy is still stronger than the EU average.

Thomas Smith

Written by Thomas Smith Published on 03.03.2023 12:17:00 (updated on 03.03.2023) Reading time: 2 minutes

Czechia’s economy fell three places last year and now ranks 12th in Europe according to a newly released Prosperity Index. Although inflation and public debt are at dangerously high levels, investment offers a ray of hope for improvement.

The index, which is a collaboration between major bank Česká spořitelna and the Europe in data portal, found that an “extreme increase in inflation” combined with the “low added value of production” prompted the fall in the rankings. Eurostat data shows that average inflation in Czechia was 14.8 percent last year – the fifth-highest in the whole EU.

The Prosperity Index is a frequently updated ranking of EU nations’ performance in various categories, such as the economy, environment, quality of education, housing, and digitization. 

What's behind the drop?

Economist and the former representative of the Czech Republic at the World Bank Jana Matesová said that three main things are to blame for Czechia’s slumping economy. Those are “extremely relaxed budgetary discipline,” “poor regulation in the energy market,” and the high concentration of dominant market sellers, which “enables the significant abuse of market power.”

Increased spending – simultaneously used to assist people with their energy bills and also to help Ukrainian refugees – has also caused public debt to skyrocket. The latest index shows that Czechia’s level of debt has moved from the fourth-lowest among EU countries to the sixth-highest. At the end of 2022, it stood at almost CZK 3 trillion, a year-on-year increase of 17 percent.

However, Czechia’s economy still remains above the EU average. The three worst-performing countries were Greece, Bulgaria, and Czechia's neighbor Poland.

The government is hoping to reduce its debt in 2023, through acts such as a windfall tax on large corporations and a potential reduction of the value of pension payments from this summer.

"Since the financial crisis, we have seen that the pace of catching up with Germany has more or less stopped, and we have fallen into what can be called a middle-income economy trap." - David Navrátil, chief economist of Česká spořitelna.

There is some cause for hope in the months ahead, though. Investment in sectors such as research and education, according to the authors of the index, is Czechia’s key route out of economic recession. The country currently has the fourth-highest share of investment to GDP in the whole EU. The crown’s safe-haven status and strong performance also provide welcome foreign interest in the country.

High spending and inflation have taken a toll on the Czech economy in the past year, but with inflation forecast to decline and GDP growth to stabilize in 2023, the government will hope for a swift rise back up the Prosperity Index's rankings.

Would you like us to write about your business? Find out more