Czech Economy in Record-Long Recession as Austerity Bites

The Czech economic recession stretched to the longest on record in the fourth quarter as the government extended its austerity program and the euro-area crisis curbed demand for exports.

Gross domestic product shrank 0.2 percent from the third quarter of 2012, marking the fourth consecutive quarterly decline, the Prague-based Czech Statistics Office said in a flash estimate today. The drop was smaller than the median estimate for a 0.3 percent contraction in a Bloomberg survey of 11 analysts. Output fell 1.7 percent from the final quarter of 2011, the steepest drop in three years.

The $217 billion economy is suffering from weakening domestic demand, with households and businesses spending less due to government austerity measures and the euro area’s debt crisis. After cutting borrowing costs three times last year to effectively zero, the central bank is navigating an uncharted territory as policy makers debate whether to further ease monetary conditions by weakening the currency.

‘Insufficient’ Demand

“The economy faces the worst of both worlds right now: a collapse in domestic demand and insufficient foreign demand,” Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd. in London, said in an e-mail. “Its saving grace, however, is its ‘safe haven’ status in the bond markets which is keeping yields extraordinarily low despite the significant political and economic risks.”

The koruna strengthened after the central bank’s policy meeting on Feb. 6, gaining 1.8 percent to the euro, its best weekly rally in 14 months. Since then it has weakened, falling 0.6 percent against the euro this week to trade at 25.378 as of 10:15 a.m. in Prague.

The government credits its policies with helping to cut borrowing costs. Yields on five-year koruna notes fell 172 basis points, or 1.72 percentage points, in 2012, touching a record-low 0.66 percent on Dec. 27. The five-year rate stood at 1.035 percent today, according to generic rates compiled by Bloomberg.

Structure Unchanged

“The positive contribution of foreign trade wasn’t able to compensate for a decline in expenditure on final consumption of households and fixed-capital creation,” the statistics office said. It didn’t publish a breakdown of the fourth-quarter GDP and will release detailed data on March 11.

Retail sales fell 5.1 percent in December, the most in three years, partly due to fewer working days than a year earlier. The unemployment rate rose to 8 percent in January, the highest reading on record, according to Labor Ministry data. Industrial output fell 12.5 percent from a year earlier in December, the biggest decline in more than three years.

Premier Petr Necas’s Cabinet has cut investments and raised taxes to trim the budget gap. While targeting a deficit of less than the EU limit of 3 percent of economic output this year, Necas wants to ease the pace of fiscal cuts starting in the election year of 2014 to help boost growth.

The sovereign-debt crisis in the euro region, the Czech Republic’s biggest trading partner, is curbing demand for automobiles, car parts and electronics goods made in the eastern European Union member.

Exports, which account for about 75 percent of Czech GDP, grew 1.9 percent in the October-December period from a year earlier, the weakest performance since the final quarter of 2009.

Auto Decline

After delivering a record 939,200 cars in 2012, Skoda Auto AS, a unit of Volkswagen AG and the largest Czech exporter, said yesterday that weaker demand in January was affected by “continued declining trend on some European markets.”

The steel industry also suffered last year. Raw steel output fell 10 percent mainly due to “weak demand from the European Union,” the Steel Industry Association said Feb. 12.

Weak demand is pushing businesses to curb costs, including spending on wages, which may further constrain household spending this year. Skoda Auto’s management rejected a trade unions’ demand for salary increases at the first round of negotiations last week, the unions said in their newsletter published on Feb. 7.

If Skoda Auto is a “benchmark for other industrial companies, it doesn’t imply anything positive for consumption of Czech households this year,” CSOB AS analysts said in a note yesterday. “The Czech economy should be driven mainly by good foreign-trade performance in 2013, while domestic demand will stagnate at best.”

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