Czech Economy to Exit Record-Long Slump as Politics Unravel

Photographer: Martin Divisek/Bloomberg

Pedestrians pass the Czech central bank (CNB) headquarters, right, in Prague, Czech Republic. Economic data are sending mixed signals, clouding the nation’s outlook, the central bank said in minutes from this month’s rate-setting meeting. Close

Pedestrians pass the Czech central bank (CNB) headquarters, right, in Prague, Czech... Read More

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Photographer: Martin Divisek/Bloomberg

Pedestrians pass the Czech central bank (CNB) headquarters, right, in Prague, Czech Republic. Economic data are sending mixed signals, clouding the nation’s outlook, the central bank said in minutes from this month’s rate-setting meeting.

The Czech economy probably exited its longest recession on record in the second quarter, defying political turmoil that’s raised the prospect of early elections.

Gross domestic product rose 0.5 percent from the previous three months in the April-June period, the first increase since mid-2011, according to the median estimate of 15 economists in a Bloomberg survey. The Statistics Office will publish preliminary data without a breakdown at 9 a.m. tomorrow in Prague. GDP shrank 1.4 percent from a year earlier, the survey showed.

The $196 billion economy has suffered the longest contraction since current records began in 1996 as efforts to narrow the budget deficit curbed household spending, the euro area’s debt crisis harmed export demand and ex-Prime Minister Petr Necas’s cabinet collapsed in June. The central bank responded by cutting the benchmark interest rate to what it calls a “technical zero” of 0.05 percent last year.

“We anticipate that government consumption and restocking were behind the growth in the second quarter, with net exports a positive contributor as well,” Martin Lobotka, an analyst at Ceska Sporitelna AS, a unit of Erste Group Bank AG, said Aug. 9 by e-mail.

Czech borrowing costs have risen since allegations of illegal spying and graft toppled Necas’s government in June. The yield on 10-year koruna bonds was 2.23 percent yesterday, holding 41 basis points, or 0.41 percentage point, below comparable U.S. Treasuries, data compiled by Bloomberg show.

No Confidence

The turmoil deepened last week after the interim government of Jiri Rusnok, picked by President Milos Zeman in a snub to lawmakers, lost a parliamentary confidence vote. The bloc of three parties that backed the previous cabinet disintegrated and deputies agreed to hold a vote on dissolving the lower house of parliament, a condition for calling early elections.

While economic uncertainty will probably hinder the economic recovery, it doesn’t materially affect the stable outlook on the country’s A1 rating because of the country’s favorable budget performance, Jaime Reusche, a sovereign-debt analyst at Moody’s Investors Service, said in a report today.

“Should the authorities choose to loosen fiscal policy to prop up economic activity, we believe that debt and deficit metrics are unlikely to deteriorate sufficiently to undermine fiscal policy credibility given the sovereign’s track record of fiscal prudence,” Reusche said.

Mixed Signals

Economic data are sending mixed signals, clouding the nation’s outlook, the central bank said in minutes from this month’s rate-setting meeting. While retail sales and industrial output fell more than analysts estimated in June, the trade surplus widened as exports fell less than imports, statistics office data showed.

After exhausting room for traditional monetary easing, policy makers are debating whether the first koruna sales in more than a decade are needed to bring inflation toward their 2 percent target from 1.4 percent in July.

Currency depreciation helps boost export competitiveness while making imports more expensive, curbing deflation risks. The koruna was little changed at 25.830 per euro late yesterday in Prague and has lost 0.1 percent in the past three months, the second-best result among major emerging-market currencies tracked by Bloomberg.

Persistent Slowdowns

Other parts of the region have struggled to shake off slowdowns, with Russian and Estonian GDP (CZGDPSAY) missing economists’ forecasts in the second quarter, advancing 1.2 percent and 1.3 percent from a year earlier. Still, the euro-area economy grew 0.2 percent from the previous three months last quarter, exiting a 1 1/2-year recession, according to a survey of 41 analysts.

Positive economic data from countries such as Germany, the Czech Republic’s biggest trading partner, may help boost the koruna, Jan Cermak, an analyst at CSOB AS, a unit of KBC Groep NV in Prague, said yesterday in a note to clients.

The currency “so far looks as if it’s neglecting the fact that the central bank is holding its finger on the intervention trigger,” he said.

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

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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