The Czech Republic has arguably the most stable economy in central Europe, but at a time when the world is being buffeted by financial crisis, there is no chance it will escape being hit next year.

First in the line of fire will be the automotive sector which, with almost 1m cars manufactured this year, is responsible for about 10 per cent of the economy. Almost all are exported to western Europe, where new car sales have plunged in the final months of the year.

“The Czech Republic and Slovakia have seen a dramatic impact in a short time frame – really since October,” says Andrew Sutherland, partner responsible for the automotive sector at the Prague office of KPMG.

“Thousands of temporary jobs have been cut and, in recent weeks, announcements have come from Skoda and Volkswagen, together with Tier 1 suppliers, of cuts in permanent jobs,” he adds.

Previous governments had poured enormous resources and effort into recruiting car companies to set up in the country to take advantage of its long industrial tradition, cheap labour and easy access to western Europe.

In recent years, there had been a push to diversify into electronics, such as flat screen televisions, and services, including business processing centres.

But the imbalance in favour of cars has not been corrected, and with foreign direct investment likely to fall next year, will not be in the near future.

That presents the greatest danger to an economy where more than 75 per cent of gross domestic product is dependent on trade, the vast majority of it tied to exports to the eurozone, particularly Germany. “We are a very export-oriented country, we depend on exports,” says Mirek Topolanek, the prime minister.

In an early sign of trouble, industrial production in October dropped by an annual rate of 7.6 per cent, mainly due to a 14.7 per cent fall in car and truck exports. Carmakers are already laying off thousands of workers and easing the throttle off production.

The problems in the car sector are feeding through to increasingly pessimistic prospects for the wider economy, which was already experiencing a cyclical downturn.

This year, it is expected to show growth of 4.4 per cent, down from 5.9 per cent a year earlier.

Just a few months ago, the central bank was predicting an expansion of 4 per cent in 2009. That has now been dropped to 2.9 per cent and, in his glummer moments Zdenek Tuma, the central bank governor, concedes growth could be even lower.

The finance ministry expects unemployment, currently 5.3 per cent, to rise to 7 per cent next year.

“The figures that are coming in on a monthly basis are really going down fast,” says Gernot Mitterndorfer, chief executive of Ceska Sporitelna, the country’s largest bank and a subsidiary of Austria’s Erste Bank.

The slowing economy will extract a penalty from government finances. Next year’s budget assumes unrealistic GDP growth of 4.8 per cent, which would lead to a deficit of 38bn korunas ($2bn, €1.5bn), but the true deficit might well be at least twice as high.

For now, cars are the main transmission belt for the economic downturn, which in other countries spread from the banking system.

By contrast, Czech banks, most of which are foreign-owned, are solid and reported strong profits for the first three quarters of this year.

The toxic assets that upended institutions in other countries are almost unknown.

“The financial sector had a lot of local profit opportunities, so Czech banks did not have to hunt for higher yields with structured assets,” says Mr Tuma.

Unlike in Hungary and Poland, where foreign currency mortgages – mainly denominated in Swiss francs – were very popular, Czechs borrowed almost exclusively in korunas, because the local interest rate has usually been one of the lowest in Europe.

Banks are further strengthened by a loan-to-deposit ratio of below 80 per cent, and by the tiny number of problem loans, although bad debts are expected to increase as lending growth slows next year.

The country has also been little affected by the international equities sell-off, because the local stock exchange, which only has 14 listings, plays a tiny role in the economy.

Although property prices never experienced the fizz seen in much of the rest of the region, particularly the Baltic states, they are also dropping, and many developers are in trouble.

Orco, one of the largest, has seen its share price plummet by more than 90 per cent and has stopped all speculative building and slashed costs.

That sort of trouble provides one of the few bright spots for those who have cash on hand.

Zdenek Bakala, a Czech billionaire who has invested in mining and property says: “There seems to be a growing stream of established companies unloading half-finished projects. Times like this are more of an opportunity than a threat.”