The Czech economy exited its longest recession on record in the second quarter of 2013 helped by recovering foreign demand while investments and household consumption continued to decline, the statistics office said in a flash estimate on August 14.

The gross domestic product grew by 0.7% on the quarter in Q2, following a 1.3% contraction in the first three months of the year. The economy shrank for six straight quarters till Q1 as the government’s fiscal consolidation measures and the eurozone’s debt crisis eroded spending by businesses and households and curbed demand for exports.

On an annual basis, the GDP contracted by 1.2% in April to June 2013, after a 2.4% slump in the first quarter. Thus in the first half of 2013 the GDP shrank by 1.8% y/y. Analysts polled by CTK news agency forecast a quarterly rise of 0.6% and an annual drop of over 1%. 

The statistics office, which is due to release a detailed GDP breakdown on September 3, said the partial recovery of total demand was supported by positive contribution of external trade with exports of goods rising by 1.4% y/y, while imports edging up by only 0.3% y/y. On the contrary, total investment activity decreased further. Household expenditure was also below last year’s level as indicated by the latest data on retail sales. General government expenditure remained almost unchanged on the year in Q2, the statistics office said.

On the supply side, activity was influenced by weak domestic demand mainly for consumer and investment goods. Thus the value added formation kept on falling in the domestic trade, construction and in industrial branches oriented on investments. The agriculture sector also contracted harmed by unfavourable weather conditions. On the other hand, positive results were reported by financial and insurance activities, the statistics office said.

The ailing economy forced the central bank to cut interest rates close to zero in November 2012 and central bankers are now debating when to launch the first in more a decade currency interventions to weaken the koruna in order to further ease the monetary conditions and bring inflation up to the bank’s 2% target. Weaker local currency will help boost export competitiveness while making imports more expensive, curbing deflation risks.

Measures to revive the economy have been delayed as the centre-right government of Petr Necas collapsed in June amid a bribery and spying scandal. The political standoff deepened further after the cabinet of leftist economist Jiri Rusnok, appointed by the president to replace Necas, resigned earlier this week after losing a vote of confidence in parliament. In a bid to put an end to the political crisis, the lower house of the parliament will vote on August 20 on a motion to dissolve itself, a necessary step towards early elections, likely to be held in October, ahead of a regular vote due next May. 

IntelliNews comment: The Czech economy is suffering from weak domestic demand as the former centre-right government introduced a number of austerity measures, including spending cuts and tax rises, as it was seeking to trim the budget gap to below the EU's ceiling of 3% of GDP. The eurozone’s debt crisis was also curbing demand from abroad but the latest data showed exports are slightly recovering. We expect the Czech economic to continue recovering in the last two quarters of 2012 supported mainly by foreign trade but at best scenario in will report a slight decline in full-2013.

Recent economic forecasts: In early August, the IMF cut its GDP estimate for the Czech Republic and now expects the economy to contract by 0.4% y/y in 2013 versus an earlier forecast for a 0.3% growth. The World Bank is also expecting a 0.4% drop for this year, while the OECD sees a deeper slump of 1%. The Czech central bank and the government are forecasting a GDP drop of 1.5% in 2013.