Czech Floods: Little Effect on GDP

The recent floods that swept the Czech Republic exerted a heavy toll on property and infrastructure, shutting the Prague Metro, regional roads, train service, and shipping routes along the Elbe River. The floods also exacerbated concerns over the recovery prospects of the Czech economy, which is experiencing its second recession in four years. The flood is likely to weigh on the tourism sector and potentially hit agricultural output, depending on the extent of water damage uncovered in the next days and weeks.

However, the construction industry, which will work to repair the extensive damages to infrastructure and property, will benefit from a short-term spike. Industrial output will remain generally stable, with most factories in Prague able to weather flooding and continue operations. In all, the floods will have a relatively mild effect on Czech GDP this year.

A boost to ailing construction sector in H2: Spurring confidence in the government’s response, Prime Minister Petr Necas guaranteed 300mn Koruna for relief efforts and 1.3bn Koruna for road and rail repair, pending a damage assessment. Analysts expect nearly 80 percent of lost inventory to be rebuilt through government assistance or through insurance claims—an effort that will stimulate the Czech construction sector. It remains to be seen, however, what portion of household income will go toward the rebuilding effort that would have otherwise gone to the purchase of other goods and services.

Construction Output, 2005 – 2013

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Source: Haver, indexed for 2010 levels

Hit for tourism and agriculture: Inevitably, temporary damage will be done to Prague’s burgeoning tourism industry, although no long-term damage is expected. In addition to the Prague Zoo, other national attractions – including the Krkonose National Park,a UNESCO Biosphere Reserve site – were damaged.

As the water level drops, the government will be best able to assess what damages the floods have caused Czech’s agriculture sector. Even minimal damage to fields will take at least a season for recovery.

Mixed effect on industry: Production was spared from large damages. Although the Spolana chemical factory temporarily shut production and transferred inventory for safeguarding, it did not suffer significant damage, and production should return to normal and alleviate whatever supply-chain challenges were created. Staropramen brewery, Czech’s second-largest beer producer, paused its production, and across the border, German automaker Volkswagen closed its Zwickau operations. Czech automakers in Mlada Boleslav and Nosovice kept operations open.

Takeaway: The 2002 floods, although far more powerful in nature, did little to affect 2002 and 2003 GDP growth. The Czech government clearly learned lessons from 2002, prompting wide evacuations and closures of infrastructure and public utilities to minimize damage this time around. The recent floods will temporarily boost the construction industry, at the expense of tourism and agriculture, but will not produce lasting damage to the Czech GDP or its growth prospects.