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Czech GDP Unexpectedly Shrinks Again Before Intervention

The Czech economy unexpectedly shrank in the third quarter, underpinning central bank concerns about deflation that prompted policy makers to start the first currency interventions in 11 years last week.

Gross domestic product fell 0.5 percent from the previous quarter after growing 0.6 percent in the April-June period, according to an initial estimate published today by the Statistics Office. The median estimate in a Bloomberg survey of 14 analysts was for a 0.5 percent advance. GDP fell 1.6 percent from a year earlier.

The $196 billion economy is struggling to gain traction after a record-long recession worsened by three years of austerity. The central bank, fearing deflation that could curb growth further, began koruna sales to stop consumers from deferring purchases and improve exporters’ competitiveness.

“In retrospect, such a weak GDP reading justifies a weaker koruna,” Michal Brozka, chief analyst at Raiffeisenbank AS in Prague, said by e-mail. “If it wasn’t for the intervention, the currency would probably weaken today. But the data bring a lot of questions and it will be interesting to see the breakdown.”

The koruna was little changed at 27.067 per euro at 9:51 a.m. in Prague, holding near the central bank’s desired rate, which it set when starting currency interventions Nov. 7.

Detailed economic data scheduled for publication Dec. 4 may show a better reading, according to Radomir Jac, chief analyst at Generali PPF Asset Management AS.

Data Mismatch

“The Czech GDP contraction doesn’t correspond to signals that have been coming from business and consumer confidence surveys and also from hard data including industrial output, orders or retail sales,” he said by e-mail. “I wouldn’t be surprised if this very negative preliminary GDP data is later revised.”

Before the koruna sales commenced, statistics-office data showed industrial output rose 7.1 percent in September, beating analyst forecasts. Accelerating exports helped widen the trade surplus to 35.1 billion koruna ($1.7 billion), the largest this year, from 19.2 billion koruna in August.

As the economy contracted for six consecutive quarters through March, the central bank responded with three interest-rate cuts that brought the benchmark to what it calls a “technical zero” of 0.05 percent.

‘Very Poor’

Exhausting the room for traditional monetary easing, policy makers decided to weaken the koruna and Governor Miroslav Singer said the bank may keep it “near” 27 per euro for at least a year and a half. The interventions will add about 1 percentage point to GDP growth next year, the bank estimates.

The Czech economy is lagging behind other ex-communist European Union members, with Hungary’s GDP showing stronger-than-expected 0.8 percent growth from the previous quarter and Poland expanding 0.6 percent, according to data published today.

The “very poor” GDP reading shows “the deep slump the Czech economy is in, massively lagging its peers in the region, held back by domestic political uncertainty and a lack of investment and borrowing,” Peter Attard Montalto, a London-based emerging-markets economist at Nomura International Plc., said in a note to clients. “It will reinforce the deflationary fears of the central bank and hence the intervention will be seen by them as justified.”

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