Most analysts agreed that the economy would continue to grow through 2007, but that the pace of the growth would slow down. From last year's 6 percent, gross domestic product (GDP) growth could drop to about 4 percent, economists concur.

"Growth in 2007 will depend on household consumption and investment," ČSOB analyst Petr Dufek said. "The slowdown will be due to the exhausting of stimuli that were behind the excellent results for 2005 and 2006."

Another successful contributor in recent years, privatization, is unlikely to further support the economy's development. The only major privatization plans remaining are for Czech Airlines, Ruzyně Airport and the Česká pošta postal services company. The current political stalemate makes it unlikely that any of these companies will be privatized in 2007.

With no growth boosters, there are major threats for the economy on the horizon.

"We're concerned about the political instability that could divert the direction of the Czech economy," said Subhash Thakur, head of the International Monetary Fund's (IMF's) mission to the Czech Republic. He insisted that the absence of key public finance reforms and the increasing budget deficit by popular-but-harmful subsidies pose a threat to the economy.

Subsidized spending

Analysts say that the IMF's worries are justified.

While pointing out the fact that this year the economy will be pushed by household consumption, analysts say that it will be also slowed by increased social subsidies from the state budget. The government will increase its mandatory payments by 69 billion Kč ($3.3 billion) in 2007.

"The current government's spending lacks responsibility and must be halted," Next Finance analyst Vladimír Pikora said.

But, given the impasse in Parliament, no major economic reforms are on the horizon.

Civic Democratic Prime Minister Mirek Topolánek, whose Cabinet faces a vote of confidence within a few weeks, is pitching a tax reform that would introduce a flat 17-19 percent income tax for individuals and corporations.

While insisting on lowering income taxes, Topolánek suggests increasing consumption taxes, such as the value-added tax (VAT) on commercial goods. Following the coalition's proposal, which will be considered by Parliament during the vote of confidence, the VAT on items in the lower tax bracket could increase from 5 percent to about 10 percent. This would boost tax yields and help reduce the mounting public finance deficit.

But the future of the proposal is on shaky ground because the opposition Social Democrats (ČSSD) and the Communist Party of Bohemia and Moravia have openly criticized it.

"We will not support increasing taxes for people with low incomes, nor an overall price increase," ČSSD Deputy Bohuslav Sobotka said.

Foreign factor

The economy will continue to rely on foreign investment, given the expected absence of key public finance reforms.

The structure of foreign investment this year will be similar to that of 2006, HVB Bank economist Pavel Sobíšek said.

"That means a major part will come from reinvested earnings of standing businesses, while the amount of new resources will be lower," Sobíšek said.

Raiffeisenbank analyst Aleš Michl said that the influx of foreign direct investment would slow down to roughly $5 billion this year.

Foreign trade will show a surplus again, analysts said, putting the figure at 35 billion to 50 billion Kč. The surplus will be achieved largely thanks to car and computer exports, and its size will depend on the prices of oil and natural gas, among other things.

Exporters will still have to cope with the strong crown, which strengthened in 2006 and will post further gains, the economists said. The crown stood at about 29 Kč per euro at the end of 2005, but closed 2006 at almost 27.60 Kč per euro.

Michl said, however, that the government's fiscal irresponsibility could soon worsen the country's image and foreign investors could consider pulling out.