Bloomberg News

Czech Economy Extends Recession on Austerity Measures

May 15, 2012

The Czech economy unexpectedly contracted by the most in almost three years in the first quarter as government spending cuts and tax increases curbed domestic demand.

Gross domestic product contracted 1 percent from the previous quarter, the steepest drop 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 0.1 percent growth in a Bloomberg survey of 14 economists. GDP fell 1 percent from the same period of 2011.

The weakening economy is making it more difficult for Premier Petr Necas to trim the fiscal deficit to match the European Union limit of 3 percent of GDP this year. The economy in Germany, the largest Czech trading partner, unexpectedly advanced 0.5 percent, data today showed.

“Compared with Germany, this is a cold shower,” said Michal Brozka, an economist at Raiffeisenbank AS in Prague. “With such weak data, the government should be cautious with spending cuts, especially on investment.”

Tax Increase

The koruna was little changed at 25.423 against the euro at 10:09 am in Prague. The yield on the benchmark 2021 bond rose to 3.348 percent from 3.282 percent.

The government raised the lower bracket for the value-added tax levied on goods and services including food, drugs and public transport to 14 percent from 10 percent starting in 2012. Necas plans to push through more austerity measures, including another increase in the VAT and reduced spending on pensions, which the central bank expects to slow the economy next year.

The tax change sparked an “extraordinary” drop in tobacco sales after consumers and retailers stocked up in the previous quarter before the increase, statistical office said.

The economy shrank 1 percent from the first quarter of 2011, the first year-on-year contraction since the last three months of 2009. The office didn’t release a breakdown of today’s data. The final report is due June 8.

Monetary-Policy Outlook

The government’s austerity plans are also clouding the outlook for monetary policy as the policy makers are divided over the effects of the measures on inflation. Inflation began to accelerate in the final quarter of last year as businesses raised prices before the tax increase took effect.

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 reported contraction exceeded even the most pessimistic expectations,” Radomir Jac, an economist at Generali PPF Asset Management in Prague said in an e-mailed note. “Weak GDP is supportive to the message of the central bank’s quarterly forecast that recommends easing monetary policy.”

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 reporters on this story: Peter Laca in Prague at placa@bloomberg.net; Radoslav Tomek in Bratislava at rtomek@bloomberg.net

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


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