Bloomberg News

Czech Recession Set to Match Record-Long Slump on Demand

November 14, 2012

Premier Petr Necas

With the prospects of a recession stretching into the country’s longest ever, Premier Petr Necas wants to ease the pace of budget cuts as he tries to avoid the fate of European leaders who were ousted as they pushed austerity measures that stunted economies from Romania to Spain. Photographer: Michele Tantussi/Bloomberg

The Czech economy probably extended its decline into a fourth consecutive quarter, matching the longest stretch of contraction on record, as the government’s austerity measures constrain household spending.

Gross domestic product fell 0.2 percent in the third quarter from the previous three months, according to the median forecast of 14 analysts in a Bloomberg survey. The economy contracted 1.2 percent from a year earlier, the median estimate of 16 analysts showed. The Statistics Office in Prague will publish preliminary data for the period tomorrow. The economy last showed four straight quarterly declines 15 years ago.

The Czech economy is suffering from weak domestic demand after the government cut investments and raised taxes to trim the budget gap. With the prospects of a recession stretching into the country’s longest ever, Premier Petr Necas wants to ease the pace of budget cuts as he tries to avoid the fate of European leaders who were ousted as they pushed austerity measures that stunted economies from Romania to Spain.

“We remain pessimistic on the growth prospects in the last quarter of this year and next year,” Stanislava Pravdova, an analyst at Danske Bank A/S (DANSKE) in Copenhagen, said in an e-mail yesterday. “Besides constrained domestic demand, the economy will probably feel the effects from a more pronounced slowdown in the euro zone through weakening foreign demand.”

Czech-koruna government bonds have rallied this year, buoyed by interest-rate cuts. The yield on the five-year koruna bond was at 0.73 percent today, near the record-low 0.70 percent from Nov. 12, according to data compiled by Bloomberg. The koruna fell as much as 0.3 percent to the weakest level in three and a half months before paring the loss to 0.1 percent at 25.475 as of 1:36 p.m. in Prague.

Taming Inflation

Weakening household spending is taming inflation, which pushed the central bank to cut rates to effectively zero and prompted talk of weakening the currency should the economy require more policy easing.

Retail sales have fallen in six of nine months this year, declining 3.3 percent in September from a year ago. The trade balance remains in surplus, although September export growth, at 0.6 percent from a year earlier, was the worst performance since November 2009.

Less than a week after pushing through a package of measures that the central bank expects to curb domestic demand next year, Necas said he wants less-ambitious deficit targets starting in the election year of 2014.

The government will aim to keep the public-finance deficit below 3 percent of economic output until 2015, after it cuts the shortfall to less than the European Union’s limit next year, Necas said in a Mlada Fronta Dnes interview published Nov. 10. The goals set in the latest convergence plan, a road map to euro-area membership, envisaged a deficit of 1.9 percent of gross domestic product in 2014 and 0.9 percent in 2015.

Borrowing Costs

The premier, who credits previous cuts with helping to reduce borrowing costs, didn’t mention any new deficit goals.

The Cabinet has cut investment, raised the sales tax and curbed spending on public wages. The budget shortfall narrowed to 3.3 percent of GDP last year from 4.8 percent in 2010. The Finance Ministry estimates it at 3.2 percent this year and the target is 2.9 percent of GDP in 2013.

The central bank reduced the main two-week repurchase rate to a record-low 0.05 percent on Nov. 1, almost three-quarters of a point below the euro-area benchmark. Most Czech central bankers agree the main interest rate should be kept at effectively zero until inflation risks rise significantly, according to minutes from their last rate meeting.

The government’s fiscal package will slow economic growth by about 0.8 percentage point next year through lower real household consumption, according to central bank forecasts.

Third-quarter GDP may be an indication of whether the economy needs more monetary easing, with the central bank forecasting quarterly growth of 0.2 percent in the July- September period.

“If the result disappoints, from the central bank’s point of view, it will be a significant anti-inflationary factor indicating room for relaxing monetary policy,” Jan Vejmelek, chief economist at Komercni Banka AS (KOMB), the Czech unit of Societe Generale SA, said in an e-mail Nov. 9.

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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