Growth Czeched

By bne IntelliNews February 9, 2009

Nicholas Watson in Prague -

The Czech Republic was touted by many as having one of the most resilient economies in Central and Eastern Europe. So it should be doubly depressing if, as some are forecasting, GDP data this week shows that the country's economy didn't grow at all or even shrank during the fourth quarter.

The Czech central bank said on February 5, the same day it cut interest rates by 50 basis points to their lowest level since 2005, that it now expects the economy to contract by 0.3% in 2009 before edging up to just below 1.0% in 2010. Previous estimates put growth at 2.9% and 3.1%.

But even this could be optimistic. On February 8, the governor of the central bank, Zdenek Tuma, conceded that the bank's next forecast could predict a greater GDP contraction than 0.3%. "Whether our next prognosis is above the current one or below it as for the GDP growth, I would personally say that if there is some difference then it will rather be negative," Tuma said in a Czech television debate reported by Reuters.

The fourth-quarter data will be a first look at how fast the economy is slowing from the 4.2% annual growth that was reported in the third quarter. The consensus is for 1.4% growth, though many economists are leaning toward no growth at all in the quarter. "In our view, the economy will shrink far more than the [central bank] assumes, by 1.6% this year," say Societe Generale analysts in a note. "Already, next week's fourth-quarter GDP report may prove that the central bank forecast is too optimistic at a GDP growth rate around 2.0% on year for the fourth quarter."

Edward Hugh, an emerging market economist, is also in the pessimistic camp. "I think the Czech economy is very near to its first quarter of contraction, indeed we may even have seen contraction in the fourth quarter. If we didn't, it will be a very close call, since not only has the trade impact been negative, and industrial output dropped like a stone, but domestic consumer demand - as reflected in retail sales - also seems to have been falling," Hugh writes on his blog.

The problem is the country's heavy reliance on the car industry and machinery manufacturing, which is seeing a collapse in demand as the country's most important trading partners in Western Europe veer into recession. Czech industrial production fell off a cliff in November, dropping by 17.4% on year. This followed a decline of 7.6% in October.

The total volume of exports also fell sharply in December, down 13.4% on year, while imports dropped 8.2% on year. "Compared with November, there has been another significant deterioration; when adjusted by two extra working days, exports fell almost 20% year on year," says Jan Vejmelek, an economist with Komercni Banka.

This meant that for the third month in a row, the Czech Republic recorded a trade deficit in December. The deficit for the month came in at CZK11.8bn (€423m), which represents a year-on-year drop of CZK9.0bn. "The figures show that the Czech economy is really in a recession stage of the business cycle... which unambiguously confirms that the recession in the Eurozone fully translated into the Czech economy in the fourth quarter," says Vejmelek.


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