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Czech Exports Helped End Record Recession as Spending Fell

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Sept. 3 (Bloomberg) -- Rising export demand helped the Czech Republic exit a record-long recession in the second quarter even as household spending renewed its decline.

The economy grew 0.6 percent from the previous three months, less than the 0.7 percent preliminary estimate published three weeks ago, the Prague-based statistics office said today. Gross domestic product fell 1.3 percent from a year earlier.

Like other post-communist nations in the European Union, the Czech Republic is looking to its main trading partners in the euro area to reignite growth after government cutbacks curbed spending and investment. The $196 billion economy ended a slump that lasted for six quarters as the central bank reduced the benchmark interest rate to near zero.

“The latest data confirm the end of the Czech recession, but the emerging growth is so far driven only by foreign demand,” Petr Dufek, an analyst at CSOB AS, a unit of KBC Groep NV in Prague, said by e-mail. “Domestic demand didn’t do very well in the second quarter, and investment data were especially disappointing.”

The Czech koruna weakened 0.1 percent to 25.704 per euro as of 1:17 p.m. in Prague, extending this year’s decline against the common currency to 2.4 percent. The yield on 10-year government debt rose 1 basis point, or 0.01 percentage point, to 2.4 percent.

Household Cutbacks

Household consumption dropped 0.4 percent from the first three months after two quarterly increases, while government spending fell 0.7 percent and fixed-capital creation declined 1.5 percent, the statistics office said. Exports rose 3.6 percent, outpacing a 2.5 percent increase in imports.

Today’s GDP numbers, both on an annual and quarterly basis, were 0.4 percentage point more than the central bank’s forecasts, the regulator said today in a statement on its website. While the data signal a “somewhat” stronger performance this year than the bank had predicted, the economy is near the bottom of the cycle and conditions remain disinflationary, it said.

After three rate cuts last year exhausted room for traditional monetary easing, policy makers are split on whether below-target inflation warrants selling the koruna on the foreign-exchange market.

The bank on Aug. 1 left its main interest rate unchanged for a sixth meeting at what it calls a “technical zero” of 0.05 percent, almost half a point below the European Central Bank’s benchmark.

First Vote

The central bank’s seven-member board voted at the last meeting for the first time on whether to start koruna sales, the bank said, without disclosing the breakdown of the ballot.

While the return of economic growth is a good signal, it isn’t a clear confirmation of a turnaround and undershooting the inflation target “may be a problem,” board member Lubomir Lizal said in an interview with the E15 newspaper published yesterday. Looser monetary conditions are needed as the koruna is overvalued compared with the central bank’s forecast, he said.

Today’s data send mixed signals to the central bank, with the end of the recession on one hand and continued weak domestic demand and an absence of inflation pressure on the other, Martin Lobotka, an analyst at Ceska Sporitelna AS in Prague, said in a note to clients.

“Those board members who voted in favor of starting interventions in August will vote for the same in September,” Lobotka said. “But those who were against will oppose it again because of the better recent data from Europe and the Czech Republic.”

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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