The Czech statistics office revised on December 4 third-quarter GDP data showing a 0.1% quarterly contraction, an improvement from a 0.5% drop announced in a flash estimate last month. On an annual basis, the Czech economy shrank by 1.3% in Q3 versus a deeper decline of 1.6% according to the flash estimate. The statistics office attributed the more favourable figures to receiving missing data and also to updating a value added estimate. The GDP dropped by 1.8% on the year in the first nine months of 2013. In nominal terms the GDP totalled 961.1bn.

On the demand side, final consumption expenditure edged up by 0.7% y/y in Q3 mainly due to government institutions, while household consumption stagnated. Total capital formation decreased by 1.7% y/y with fixed capital formation down by 5.6% y/y and 0.6% q/q, whereas inventories grew by over CZK 15bn. Exports fell 0.2% y/y and imports rose 1.8% y/y in Q3.

On the supply side, the gross value added dropped by 1.2% y/y and 0.7% q/q in Q3 pushed down by a 5.5% y/y fall in construction, a 0.9% y/y decrease in manufacturing, a 2.1% y/y decrease in agriculture and a 6.1% y/y drop in real estate activities. In a positive note, financial and insurance activities grew by 12.1%. 

IntelliNews comment: Despite the upward revision the economy still slipped into contraction in Q3 suggesting that it may be heading back to recession after in Q2 it exited a record-long slump that lasted for 18 months. The weak GDP data justifies the central bank’s decision from Nov 7 to step into the currency market for the first time in more than a decade to further ease monetary conditions after exhausting traditional policy tools with rates close to zero for nearly a year. The central bank started koruna sales seeking to weaken the local currency and bring inflation up to its target of 2%. A weaker local currency will boost exports that account for some 80% of the country’s economic output, increase import prices and limit deflation risks. But a rise in prices due to currency depreciation could hurt household consumption and in return weigh on the fragile economy.

Rising industrial output and gradually recovering consumer confidence as evident from growing retail sales will help the economy on its way to recovery. But at best scenario the GDP will report a slight decline in full-2013.

The Czech central bank sees a 0.9% GDP decline for this year and the finance ministry expects a slightly deeper drop of 1%. Stronger foreign demand and recovering domestic consumption will help the economy return to a growth in 2014.

Measures to revive the economy have been delayed due to the political standoff that started with the collapse in June of the centre-right government of Petr Necas amid a bribery and spying scandal. Czechs held early general elections in October that produced a highly fragmented parliament. The main centre-left party Social Democrats (CSSD) narrowly won the vote and now is holding talks with anti-corruption movement ANO and Christian Democrats (KDU-CSL) to form a three-party government.