IMF downgrades GDP forecasts

The outlook for European growth in 2012 is much grimmer than originally thought, and the Czech Republic is no exception, with new GDP growth forecasts driven down by the sluggish growth of eurozone trading partners. Even so, the domestic budget passed for 2012 remains based on much higher growth forecasts, which might mean more bad news is on the way, as already strict austerity measures could get even more restrictive when the government catches up with the rest of the country's economists.

The International Monetary Fund (IMF) recently released its downgraded growth expectations for Europe, putting Czech growth forecasts at 1.8 percent, down from 2.9 percent, while Czech economists unveiled their own revised growth numbers were even worse, even as low as 0.3 percent predicted by Raiffeisenbank.

"There will be more escalation of the debt problems in the eurozone, and we expect some really low investment growth in the EU, which translates to low export growth in the Czech Republic," said Raiffeisenbank analyst Michal Brožka. "This, together with further fiscal consolidation, translates into negative growth in government spending of around 2 percent."

Meanwhile, the government unanimously passed the 2012 budget based on growth of 2.5 percent, though that is expected to be decreased by a full percentage point.

"The question is what to do about it," said Pavel Sobíšek, chief economist at UniCredit, saying the government will likely keep the budget as it is now and wait to see if growth falls more than forecast.

"There is a risk an even deeper GDP revision will be needed before the end of this year, and that would be a real problem, because you can save 10 billion Kč [$549 million] of expenditures in the course of next year, but you cannot, in the same way, save 30 billion Kč," he said.

Now, the aim of the budget is to narrow the deficit to 3.5 percent of GDP from 4.2 percent in 2011 with a deficit limit of 105 billion Kč from 135 billion Kč planned for this year. At the same time, the government plans to make up for budget shortfalls by raising the lower bracket value-added tax to 14 percent from 10 percent, and leaving the higher bracket at 20 percent.

The worsening situation highlights the current global debate of austerity versus stimulus. Along the same lines as most of Europe's major economies, the Czech Republic has thus far chosen a strategy of fiscal tightening, which industry associations and unions say is making the situation worse.

"Restrictions will be harder than currently proposed by the Finance Ministry," said Vít Samek, economist for umbrella labor union ČMKOS, citing cuts "aimed at social benefits."

"Therefore, the income situation of households will be very difficult, and it will be very risky next year from the point of view of sustaining social peace and society."

Though economists said fiscal austerity makes sense in the immediate future, if growth falls further or the country goes into recession, some stimulus might be in order. Several doubted the government would ever consider it, even though "budget problems are not that imminent," according to Sobíšek, which provides for some wiggle room.

"The Czech Republic is in a situation that allows it to provide some fiscal stimulus measures for GDP growth. For example, the yields and level of prices of Czech bonds show that the Czech Republic can finance itself," Brožka said.

The IMF's current forecast for 2012 Czech unemployment actually improved to 6.6 percent from 7.1 percent. Unions counter that unemployment will grow from public job cuts and reduced public and private spending in construction and manufacturing.

Economists warned any more negative news for GDP growth in Germany, the Czech Republic's main trading partner, will hurt job growth at home.

Growth this year has been entirely based on exports, mostly to Germany. But the so-called "engine" of the eurozone has been sputtering, with recent stagnant growth figures, and growth forecasts for next year span from the IMF's prediction of 1.3 percent to as low as 0.7 percent according to some economists.

"We just saw the Purchasing Managers' Index heading downwards [to 50.8 points from 51.3 in August], another indication that the most important trading partner of the Czech economy is falling down, possibly heading toward a recession next year - that's the main reason for the [downward GDP growth] revision," said David Marek, chief economist at Patria Finance.

Sectors hit so far in the Czech Republic by weak purchasing include computers and pharmaceuticals, and the country's key sectors like auto and electronics manufacturing could be next, along with construction, said Milan Mostýn, a spokesman for the Confederation of Industry.

"In many European countries, there are already signals. Some automakers are in trouble and are limiting production. The question is how strong this trend will be reflected in the automotive industry in the Czech Republic," he said.

Already, orders for some auto companies are dropping.

Domestically, reduced state spending and the higher VAT, which will reduce consumption, will be another hit to industry.

"What will also be important is the development of the Czech currency," Mostýn said.

To further confuse matters, the country's recent bond rating upgrade by Standard & Poor's, up two notches to AA-, is something that at face value would seem a good sign for the Czech economy, but could "complicate life for exporters," according to Mostýn, as it will strengthen the exchange rate. 

Cat Contiguglia can be reached at
ccontiguglia@praguepost.com