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Czech GDP Falls for Third Quarter as Austerity Fuels Slump

The Czech economy shrank for a third consecutive three-month period from July to September, one quarter short of matching the longest decline on record as government austerity measures damped domestic demand.

Gross domestic product fell 0.3 percent from March-June, compared with a revised 0.4 percent decline in the previous three months, the Statistics Office in Prague said in a statement on its website today. GDP contracted 1.3 percent from a year earlier, also a third straight decline and the worst reading since the end of 2009.

The economy is suffering from weak domestic demand as households and businesses cut spending due to government austerity programs and the euro-area debt crisis. With the risk of a recession stretching into the longest ever, Premier Petr Necas wants to ease the pace of austerity after next year to avoid the fate of European leaders who were ousted as they pushed measures that stunted economies from Romania to Spain.

“The key message is that domestic demand remains weak, particularly household consumption,” Radomir Jac, chief economist at Generali PPF Asset Management in Prague, said in an e-mail. “The Czech economy is operating well below its potential and the development is thus generating disinflationary pressure.”

Domestic Demand

Household spending fell 0.4 percent in the third quarter compared with the previous three months, and was down 2.4 percent from a year ago, the data showed. Gross capital formation fell 5 percent from the previous quarter and declined 9.4 percent from a year ago.

Both quarterly and annual GDP numbers were 0.5 percentage points below the central bank forecast, mainly due to stronger-than-expected imports which curbed the positive contribution of foreign trade, the Ceska Narodni Banka said in a statement on its website.

“For the current CNB forecast, the new GDP data represent a risk toward a deeper decline in economic activity,” the bank said. It forecast full-year GDP to fall 0.9 percent in 2012.

The koruna weakened 0.1 percent to 25.200 against the euro as of 1:31 p.m. in Prague, the fifth-worse performance today among 25 emerging-market currencies tracked by Bloomberg.

The statistics office also published revisions of GDP. According to the latest figures, the economy contracted in all three quarters this year on a quarterly basis, after stagnating in the final three months of 2011.

Underperforms Neighbors

The Czech Republic is underperforming its neighbors in central Europe. Poland’s economy, the biggest among the post-communist EU members, expanded 1.4 percent in the third quarter from a year earlier, while GDP in smaller Slovakia rose 2.1 percent.

A lack of household spending is taming inflation, which pushed the Czech central bank to cut rates to effectively zero and prompted talk of weakening the currency should the economy require more policy easing.

Since taking power in 2010, the Cabinet has cut investment, raised the sales tax and curbed spending on public wages. The budget shortfall narrowed to 3.3 percent of GDP last year from 4.8 percent in 2010. The Finance Ministry estimates it at 5 percent this year, due to a one-time inclusion of future payments for a settlement with churches. The target is 2.9 percent of GDP in 2013.

Trade Surplus

The trade balance remains in surplus, mitigating part of the effect of domestic demand on the performance of the economy. Separate statistics published today showed October exports rose 7.5 percent from a year earlier, although the statistics were affected by a larger number of working days. Data adjusted for the calendar impact showed exports declined in October, according to Jac.

Foreign demand will remain the sole positive contributor to Czech economic performance in the next two quarters, Martin Lobotka, an analyst at Ceska Sporitelna AS, a unit of Erste Group Bank AG, said.

“Since fiscal restriction continues and since uncertainty won’t disappear, household demand will remain weak,” Lobotka said. “Firms will also have little incentive to invest as uncertainty remains high and capacities are underutilized.”

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