Czech Slump Deepens as Decline Stretches Into 6th Quarter

The Czech Republic’s recession deepened in the first three months of the year, extending to the longest since records began in 1996, as Europe’s debt crisis hurt exports and austerity measures curbed spending.

Gross domestic product fell 0.8 percent from the previous quarter, compared with a 0.3 percent decline in October through December, the Statistics Office in Prague said in a preliminary estimate today. The sixth consecutive quarterly decline was worse than the median forecast of a 0.1 percent contraction in a Bloomberg survey of 13 economists. GDP fell 1.9 percent from a year earlier, the biggest drop since 2009.

“The Czech economic recession isn’t approaching an end, but rather it’s culminating,” Petr Dufek, an analyst at CSOB AS, the Czech unit of KBC Groep NV, said in an e-mail. “There was no doubt that the recession continued, but the significant acceleration of the decline at the beginning of the year was surprising.”

The $217 billion economy is hampered by weak domestic demand as the government is focused on narrowing the budget gap and Europe’s debt crisis curbs Czech exports such as cars and auto parts. After cutting interest rates to effectively zero last year, the central bank is debating whether to weaken the koruna to stimulate spending as inflation remains below target.

The Czech koruna weakened after the data, sliding as much as 0.6 percent to 26.044 per euro, the weakest level since November 2011. It traded 0.3 percent lower at 25.972 by 1:40 p.m. in Prague, the worst performance among 31 major currencies tracked by Bloomberg.

Wider Deficit

After cutting investment and raising taxes to curb the budget deficit in the past three years, the government of Prime Minister Petr Necas agreed last month to target a wider shortfall than initially planned in 2014, when elections are next held, to boost growth.

The government credits its fiscal measures with helping to cut borrowing costs to record lows, with the yield on the 10-year government bond falling to an all-time low of 1.52 percent on May 9, according to data compiled by Bloomberg.

Household and government consumption was no longer the main cause of the economic recession in the first quarter, the statistics office said in a statement.

‘Important Turnaround’

“The important turnaround occurred during the last months in the external trade development and its contribution to GDP,” it said. “Decreasing external demand, due to the overall economic recession, is gradually reflected in export opportunities of the domestic economy. After three years of growth, domestic export dropped in the last quarter and external trade was no longer a source of the GDP growth.”

Czech exports fell 4.4 percent in the first quarter, compared with a 5.2 percent slump in imports, according to the statistics office.

The Ceska Narodni Banka left the benchmark two-week repurchase rate at 0.05 percent for a fourth meeting on May 2. After three rate cuts last year exhausted the scope for further reductions, the koruna is at the center of policy makers’ deliberations as a weaker exchange rate boosts exports that account for about 80 percent of economic output, increases import prices and limits deflation risks.

“The bank board is repeatedly communicating that we are prepared to use foreign-exchange interventions in case there is a need to ease monetary policy further,” central bank Governor Miroslav Singer told lawmakers in parliament today.

‘Cold Shower’

On the demand side, Czech consumers aren’t signaling a turnaround in the economy as retail sales declined in five consecutive months through March and the confidence indicator worsened again in April after improving in two previous months.

The central bank on May 2 cut its GDP outlook for 2013 to a 0.5 percent contraction and forecasts the economy to grow 1.8 percent next year.

“The Czech GDP reading is a cold shower in the context of both external developments, and also some domestic data,” said Radomir Jac, the chief analyst at Generali PPF Asset Management AS in Prague. “The data are also much worse than expected by the Czech central bank and a weakening of the koruna in response to the data release is a quite natural reaction.”

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