Czechs exit recession but recovery remains elusive
PRAGUE, Aug 18, 2013 (AFP) The Czech Republic has shaken off a record 18-month recession, but analysts warn that a real recovery in central Europe's third largest economy may take time.
The EU member of 10.5 million people posted growth in the second quarter of this year, exiting recession alongside France, Portugal and the eurozone as a whole in a sign of hope for the region.
The Czech economy, central Europe's third largest after Poland and Austria, grew by 0.7 percent compared to the previous quarter, according to official data released Wednesday.
It was the same pace as that of European top-dog Germany, Prague's key trading partner in the eurozone, which the Czech Republic has yet to join.
But on an annual basis, Czech gross domestic product (GDP) fell, albeit at a slower pace than in the first quarter.
"We can only truly call it growth when the economy grows on an annual basis" as well, said Marketa Sichtarova, an analyst at the independent Next Finance company.
"If we understand a recession in the broader sense as a situation with growing unemployment, falling industrial output and decreasing consumer spending, this is exactly what we still have," she told AFP.
Compounding its problems, the Czech Republic has been mired in a political crisis that erupted when its austerity-minded centre-right government fell over a spy and bribery scandal in June.
Analysts say the conflict has so far had little impact on the economy.
Top political parties are hoping snap elections will quickly resolve the turmoil, while analysts are banking on the recovering eurozone to pull the country out of its economic woes.
The ex-communist country is heavily dependent on car production, which makes up more than 20 percent of its industrial output, and on exports to western Europe and Germany in particular.
"The development of the Czech economy will continue to depend largely on the eurozone's revival," said Tomas Vlk, an analyst at the Prague-based investment bank Patria Finance.
"The latest data from Germany show a decent recovery, and what is good for the Czech economy is that it was pulled mainly by German domestic demand."
Exports drove Czech growth, but household spending remained low. Second-quarter retail sales were stagnant and inflation fell to 1.4 percent in July, down from 3.3 percent in 2012.
Household spending is a major contributor to growth, making up more than half of the Czech Republic's total GDP.
Consumption was largely undermined by the policy of the toppled centre-right government, which took a host of austerity steps including raising the sales tax twice.
"The two increases in value-added tax were quite a blow for consumers and the recession may not have been so deep if they hadn't taken place," said Sichtarova, suggesting that higher prices made buyers reluctant to spend.
Slower spending and inflation have forced the central bank to act.
It slashed its main lending rate to a record-low 0.05 percent in November, Europe's third lowest after Switzerland and Bulgaria, according to the US-based Trading Economics firm.
Reluctant to push lending rates any lower, the central bank recently signalled it may resort to intervening on the foreign currency market to weaken the koruna.
A weaker currency would not only help Czech exports, but also push inflation up closer to the central bank's target rate of 2.0 percent as imported goods would be more expensive.
But both Vlk and Sichtarova said the fresh quarterly data had somewhat reduced the need for such a step.
"The economic improvement will reduce the risk of central bank interventions, but only moderately as inflation remains the key factor and it won't be pulled up by the weak domestic demand," said Vlk.
"The data took the wind out of the central bank's sails and showed the economy will manage on its own, without intervention," added Sichtarova.
"I would advise to wait until it gets sorted out on its own and until the growth in Germany gets us started."
