First signs of economic recovery

The sharpest slowdown in the Czech economy may finally be over, according to "cautiously optimistic" former Finance Minister Miroslav Kalousek and an equally tentative consensus among economic analysts.

If the forecasts of Kalousek and others prove right, economic results will continue to worsen, but the falls will begin to level off and stabilize in the second half of 2009.

"It seems that the hardest days and weeks of the recession are now, but we are already starting to feel the first signs of stabilization," Kalousek said at a meeting of EU finance ministers in Brussels May 5. "Let us hope that the first signs of revival will come next year."

A revised European Commission (EC) report May 4 predicts the Czech Republic will fare much better than the EU as a whole, with gross domestic products (GDPs) contracting 2.7 percent and 4 percent, respectively. The EC expects Czech GDP to finally grow 0.3 percent in 2010. The Finance Ministry has predicted 0.8 percent, and the same forecast from the Czech National Bank (ČNB) is a more optimistic 1.4 percent. While the past several months have been a succession of downward revisions from the EC, the ČNB, the Czech Finance Ministry and banks, there may finally be the possibility of upward revisions after the second quarter of 2009, said Jiří Škop, an economic analyst at Komerční banka.

Tied to global demand

"We're not thinking about any revision right now, but it's a possibility if the eurozone actually does better in the next quarter," he said, adding that the scrap-subsidy programs abroad have had the single-largest effect on the export-dependent Czech economy. While a complete picture of the recession will only be seen in hindsight, economists have pinpointed the beginning to the final quarter of 2008 and are beginning to predict that the first quarter of 2009 will have been the worst of it.

"I would say we're just after the bottom," said Vladimír Pikora of NextFinance. "I expect it will show that the worst month was February. In March, we finally saw some improvements from the German government's scrap subsidy."

Pikora said improving economic indicators from the United States and Western Europe suggest the economic situation could improve, as the Czech Republic's economic recovery is tied to global demand. Domestically, the Prague Stock Exchange finally saw its deterioration decelerate in the first quarter of 2009 after losing 53 percent of its value in the final quarter of 2008. In March, the index added 17 percent, making up for losses in February.

"The stock markets indicate we're mostly behind the bottom, markets can have quite a good predictive power. The question is how fast the recovery will be," Pikora said.

A higher-than-expected Czech foreign trade surplus in March has also brought hope that the worst is over. The country posted a surplus of 23.4 billion Kč in March, and exports fell 6.3 percent year on year, a much milder fall than ones experienced in the previous two months. January's exports dropped 24 percent in the same period, and February's exports were down 22.2 percent, according to data from the Czech Statistical Office.

Inflation has likewise slowed, and is expected to fall below the ČNB's target of 2 percent this year, aided by the recent depreciation of the crown, Škop said. In response to the inflation and currency developments, the ČNB made a historic rate cut to hit 1.5 percent, the country's lowest benchmark interest rate. In a press conference after the May 7 board meeting, ČNB Governor Zdeněk Tůma said the crown will first correct losses from earlier this year, then stabilize to a 2009 average of 26.60 Kč to the euro and 25.90 Kč to the euro in 2010.

"There is some spreading optimism on the global markets, and I think not only the crown, but other Central European currencies will benefit in the next quarter or two," said Jan Vejmělek, head of economic and strategy research at Komerční banka, which also predicted the crown strengthening to below 26 Kč to the euro next year.

Weaker is better

In the midterm, before the crown hits that level, it will be an advantage to the economy if the currency remains slightly weak, Vejmělek added, and he expects that the currency could continue to depreciate in the next one or two quarters.

"A weaker crown should support our exporters, because it will make them more competitive on foreign markets," he said.

Other sectors and economic indicators will continue to decline however because of lags, such as the services sector and unemployment figures. Construction will not stabilize in the midterm because of its dependence on the housing market, said Škop, and consumption will decline as growing unemployment limits household spending. Unemployment in the Czech Republic is expected to hit 6.1 percent this year and 7.4 percent in 2010.

"Decline in consumption is smoother and more gradual, but it's lagged as the recession is caused by slowing foreign demand, then slowing industrial output, then unemployment and finally consumption," Škop said.

While analysts and leaders hope the bottom has been hit, "no one knows the real development," Kalousek said at the May 5 meeting, but Pikora said he expects a clearer picture to emerge when April's figures on trade and output are released.

Claire Compton can be reached at
ccompton@praguepost.com