Czech Economy Expands Most in Two Years on `Surprising' Domestic Demand

Czech economy grew at the fastest pace in two years in the second quarter as declining unemployment and rising wages led to an unexpected increase I demand from domestic consumers.

Gross domestic product rose an annual 2.4 percent, compared 1.1 percent in the first quarter, the statistics office in Prague said today on its website. The second-quarter figures were revised up from a 2.2 percent estimate published Aug. 13.

East Europe is recovering from the worst recession since the end of communism as trade picks up after the credit crisis curbed investments and companies cut jobs. While exports account for 70 percent of Czech GDP, the economy got a boost in the second quarter as household consumption increased 0.8 percent, compared with 0.1 percent in the previous period.

“The data published today confirm that the economy has visibly emerged from the recession,” the central bank said in a statement. “The higher-than-forecast annual growth was to a large extent influenced by a surprising increase in household consumption.”

Domestic consumption added 0.6 percentage points to annual economic growth, the statistics office said. Foreign trade added 0.4 percentage points as consumers and businesses in the euro area bought more of the country’s products, including cars made by the local factories of Skoda Auto AS and Hyundai Motor Co.

Unemployment Falls

Separate data released today showed that the unemployment rate dropped to 8.6 percent in August, from 8.7 percent in the previous month. The jobless rate reached a high of 9.9 percent in February. Retail sales rose 7 percent in the year through June and 3.5 percent in May, after falling 4.5 percent in April.

“The job market developed better in the first half than what the initial expectations were, which had a positive impact on consumers’ confidence,” said Michal Brozka, an analyst at Raiffeisenbank AS in Prague, in a phone interview.

The central bank on Aug. 5 raised its forecast for 2010 economic growth to 1.6 percent from 1.4 percent. GDP increased 0.9 percent from the previous three months in the second quarter, the statistics office said today.

The bank kept its benchmark two-week repurchase rate unchanged at a record-low 0.75 percent last month, saying the inflation rate would stay below its 2 percent target through the second half of 2011. Price growth accelerated to 1.9 percent in July, the fastest in 16 months, on food and natural gas costs.

The central bank has signaled that interest rates will start raising from the second half of next year, while two policy makers have in recent days said policy tightening may need to come sooner.

The central bank will “certainly pay attention” to the data on household consumption and the decrease in unemployment Brozka said.

“However, we think it is still too early for thoughts about increasing interest rates, and we don’t expect an increase in rates this year,” Brozka said.

To contact the reporters on this story: Peter Laca in Prague at placa@bloomberg.net;

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