Bloomberg News

Czech Recession Deepens in First Quarter on Domestic Demand

June 08, 2012

The Czech economy contracted for a third quarter in the first three months of the year as falling domestic demand outweighed rising exports.

Gross domestic product shrank 0.8 percent from the previous quarter, the steepest drop in almost two years, after shrinking 0.1 percent in the final three months of last year, the Prague- based Czech Statistics Office said today. The result was better than the flash estimate of a 1 percent decline published on May 15. GDP fell 0.7 percent from a year earlier.

The weakening economy is making it more difficult for Premier Petr Necas to trim the fiscal deficit to the European Union limit of 3 percent of GDP this year. Fading household spending may support arguments for lower borrowing costs after two central bank board members, including Governor Miroslav Singer, voted for a rate cut on May 3.

“Overall, the data should confirm weakening economic activity, which should enable the central bank to lower the key interest rate to 0.5 percent at its June meeting,” Jan Vejmelek, chief economist at Societe Generale SA’s Komercni Banka AS (KOMB) in Prague, said in an e-mail before the release.

Final consumption fell 1.1 percent in the first quarter, with household demand decreasing 2.3 percent, the statistics office said. Government spending rose 1.8 percent from the previous quarter.

Tax Increase

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 government’s austerity plans are clouding the outlook for monetary policy as central bankers 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.

Singer and Vice-Governor Vladimir Tomsik sought a quarter- point rate reduction in interest rates at a May 3 policy meeting, while four policy makers voted to keep the benchmark two-week repurchase rate at a record-low 0.75 percent. 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.

-- Editors: Alan Crosby, Balazs Penz

To contact the reporters 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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