Bloomberg News

Czech Economy Extends Recession on Austerity Measures

May 15, 2012

(Corrects direction of annual figure in second paragraph.)

The Czech Republic’s recession unexpectedly deepened in the first quarter as the government’s spending cuts curbed domestic demand amid an increase in the value-added tax.

Gross domestic product contracted 1 percent from the previous quarter, the steepest fall since the second quarter of 2009, after shrinking 0.1 percent in the final three months of last year, the Prague-based Czech Statistic Office said in a flash estimate on today. The reading was worse than the median forecast of zero growth in a Bloomberg survey of 13 economists. GDP decreased 1 percent from the same period of 2011.

The weakening economy is complicating Premier Petr Necas’s efforts to trim the fiscal deficit to match the European Union limit of 3 percent of GDP this year. Necas plans to push through austerity measures, including an increase in the value-added tax and smaller spending on pensions, which the central bank expects to slow the economy next year.

“The fall in GDP was the result of the extraordinary development of two different and normally stable sectors,” the office said, referring to the financial industry and tobacco sales after consumers and retailers built up stockpiles at the end of 2011 before a tax increase in January.

Tax Change

The government raised the lower bracket for VAT levied on goods and services including food, drugs and public transport to 14 percent from 10 percent starting in 2012. Inflation began to accelerate in the final quarter of last year as businesses raised prices before the tax increase took effect.

The government’s austerity plans are clouding the outlook for monetary policy as the policy makers are divided over the effects of the measures on inflation.

Czech central bank Governor Miroslav Singer and Vice- Governor Vladimir Tomsik sought a quarter-point rate reduction in interest rates at a May 3 policy meeting, minutes from the session showed on May 11. Four policy makers voted to keep the benchmark two-week repurchase rate stable at a record-low 0.75 percent, while one board member voted for a quarter-point increase in the rate, which has been unchanged for two years.

The economy, which exports about 80 percent of its output, contracted in the third and fourth quarters of 2011 as government spending cuts outweighed demand abroad for Czech-made vehicles, car parts and electronics goods.

While the economy extended the recession, Necas’s 20-month- old administration wants to push through 57 billion koruna ($3 billion) worth of budget measures to narrow the deficit to 2.9 percent of GDP next year from the planned 3 percent this year.

The central bank forecasts a stagnant economy this year and a 1.9 percent expansion in 2013.

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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