This is the fastest first-quarter growth the country has posted since 1995 and well above that of other CEE countries. Slovakia's GDP grew 6.3 percent, and Poland's was up 5.2 percent. GDP in Hungary increased 4.6 percent.

The Baltic states boasted the best results in the European Union, with Estonia's GDP increasing 11.6. The EU average was 2.2 percent.

"It's another sign that the Czech Republic is keeping pace with Western Europe," said Vladimír Pikora, an analyst at Next Finance.

Threats looming

The economy is being driven by the booming manufacturing sector, household consumption, foreign investment and exports, Pikora said.

The export economy remains the largest force behind the economy's rapid ascent, with the automotive sector doing much of the work. Exports increased 17 percent in the first quarter, and the trade balance ended in a surplus of 25.5 billion Kč ($1.2 billion), 1.3 billion Kč more than in the same period last year.

This is despite record oil prices and the strengthening crown, which in theory should make Czech goods more expensive abroad, Pikora pointed out.

ČSOB analyst Petr Dufek said household consumption increased thanks to wage growth and cheap loans. Wages increased approximately 7 percent in the first quarter

Despite the health of the economy, analysts were quick to mention several threats.

David Navrátil, an analyst at Česká spořitelna, said the rise in household consumption could drive up inflation, which would likely prompt the Czech National Bank (ČNB) to increase interest rates. Inflation was 3.1 percent in late May, and the basic interest rate, set by the ČNB, was 2 percent.

"I expect the ČNB board to raise rates in July after it takes the latest statistics into account in its updated forecast," Navrátil said.

Analysts also warned against the economy's growing dependence on the automobile industry.

"Given the expected expansion of the automobile industry after Korean carmaker Hyundai launches production in Nošovice in 2008, most analysts are warning that the economy could become too dependent on the automobile sector," said David Marek, an analyst at Patria Finance.

Slowdown on the horizon

The country's top political leaders were quick to respond to the release of the GDP figures. Outgoing Prime Minister Jiří Paroubek, whose Social Democratic Party came in second in the June 2–3 general elections, said it was too bad the data wasn't released during the pre-election campaigns.

Meanwhile, Mirek Topolánek, the leader of the Civic Democrats, the party that took the most votes in the elections and is now in talks with the Christian Democrats and the Green Party about forming a coalition government, said the country should capitalize on the growth by implementing long-awaited reforms to the pension and healthcare systems.

"I think it is up to all political parties to use this economic growth to implement structural reforms, reduce unemployment and gradually lower the public finance deficit," Topolánek said.

Economists said GDP growth peaked in the first quarter and will slow in the coming months.

"However," said ČSOB's Dufek, "we still expect an excellent result for the Czech economy this year."