out of your window as you take off from prague airport on your way home. so this is about lifestyle : good beer, heavy food and bathing. actually, many czechs would say that this is the very definition of how to relax and be cool about the world and life. but this would also be a rather simplistic caricature. so let ’ s go further. ours is a country with a long and entrenched tradition of industrial production and manufacturing. this goes back to the 19th century, to the time of the austro - hungarian monarchy, when this part of the empire used to be its industrial undisputed powerhouse. this tradition has survived through wars and totalitarian regimes to the present day. even now, the czech republic is the country with the highest ratio of industrial production to gdp in the whole of the eu and the ratio is higher than in germany, a fact which many do not know. and it has actually been rising rather than falling over the last 10 years or so. this is manifested in the fact that the czech republic is the second biggest producer of cars per head in the world. moreover, the czech republic and slovakia – which formed a single state until 1993 – are together by far the biggest car - producing countries in the world in per capita terms. with 150 cars produced per every 1, 000 citizens these two countries are well ahead of south korea and germany combined in per head metrics. so whenever you drive your skoda, hyundai, peugeot, kia, volkswagen or even porsche, don ’ t be surprised to learn that they were actually manufactured within a radius of 300 kilometres of prague. by the way, ferdinand porsche, the 1 / 2 bis central bankers'speeches founder of the porsche car manufacturer, was also born here, 100 kilometres north of prague. many of my friends in the real economy say that the czech republic is a country where everything is produced, from wings for airbus and embraer aircraft ( we are also the biggest producer of ultralight planes in the world, for instance ), through turbines, cars, buses, locomotives and guns to bearings, brushes and semtex. whatever you need to produce you will always find at least one factory capable of making it, the anecdotic evidence seems to be suggesting. as exports obviously feed this country, and as we are so close to germany and the germanspeaking world, you won ’ t be surprised to learn that germany is by far our biggest trading partner, with more

. 4 finally, most countries that had large budget deficits have now positive primary surpluses. in sum, the euro area is now in a better state to withstand future economic or financial shocks. despite robust growth dynamics, inflation developments have been subdued. euro area headline inflation stood at 1. 5 % in september 2017, according to eurostat ’ s flash estimate and is expected to temporarily decline towards the turn of the year owing to energy - related base - effects. measures of underlying inflation have not yet showed convincing signs of a sustained upward trend ( see chart 3 ). 4 / 7 bis central bankers'speeches sources : eurostat and ecb calculations5. looking further ahead and according to the latest ecb staff projections, inflation is expected to rise to 1. 5 % in 2017, 1. 2 % in 2018 and 1. 5 % in 2019. there are uncertainties clouding the medium - term outlook for price stability, most notably the recent exchange rate volatility, which requires monitoring with regard to possible implications for inflation dynamics. the inflation outlook from the recent imf weo depicts inflation at 1. 5 % in 2017 and 1. 4 % in 2018, which is broadly in line with ecb projections. the apparent disconnect between strong economic activity, on the one hand, and low inflation and wages on the other, is one of the stand - out characteristics of the ongoing recovery. 6 from a policymaker ’ s perspective, a predictable relationship between slack and inflation represents a key monetary policy transmission mechanism through which central banks exert their effect on inflation dynamics. while there is no agreed upon approach to estimating a phillips curve linking inflation to slack, on the whole empirical estimates indicate that the slope is currently flatter than in the period preceding the crisis, with several explanations as to why this might be the case. one reason relates to the choice of slack measurement, as the crisis may have led to structural changes in the labour market. for example, when a broader measurement of unemployment is used ( unemployment 6, currently just below 18 % ) as opposed to the narrower definition ( unemployment 3, standing at 9. 1 % ), the slope of the euro area phillips curve appears to have become steeper in recent years. other reasons proposed include : external factors including globalisation, the enhanced role of adaptive expectations in influencing wage and price decisions, anchored by central bank targets, and finally, non - linearities and time - varying behaviour of 5 / 7 bis central bankers '