Economy struggles as eurozone slumps

With the Czech economy languishing in one of the worst recessions on record and with unemployment at an all-time high, analysts are looking hard to find reasons for optimism this year. Despite dismal jobless figures and stagnant growth, a chink of light comes from more positive indicators from Germany, the Czech Republic's main trading partner and a key export destination for Czech manufacturers.

The news has come, however, as European Commission economists have downgraded growth forecasts for the 17-member eurozone. The commission predicted Feb. 22 the eurozone economies would contract 0.3 percent this year, compared with a previous forecast of 0.1 percent growth.

For the Czech economy, which lies outside the single-currency bloc, the commission expects zero growth in GDP, which if realized would be a better result than last year, when there was an estimated 1.1 percent contraction. Assuming government policies are unchanged, Brussels predicts 1.9 percent growth in the Czech economy in 2014.

For the European Union as a whole, the commission forecasts, after a 0.3 percent contraction in 2012, there will be 0.1 percent growth this year and 1.6 percent expansion in 2014.

"Financial market conditions in the EU have improved substantially since last summer. But economic activity has been disappointing in the second half of last year," the commission said in a statement. "However, leading indicators suggest GDP in the EU is now bottoming out, and economic activity is expected to gradually accelerate."

Offering a similar verdict, Czech National Bank (ČNB) Governor Miroslav Singer had earlier said the Czech economy appeared to have reached its lowest point after an 18-month recession.

"We are, or at least we think we are, passing through the bottom of this decline," he told media. A slight further drop in GDP is nonetheless expected by the ČNB, which recently lowered its growth forecast for 2013 from minus 0.2 percent to minus 0.3 percent.

Before things improve, unemployment is predicted to worsen. In January, the figure for those out of work in the Czech Republic reached a record high of 8 percent, according to a new method for calculating the figure; under the old system, it would have been 10 percent.

At the end of January, the number of unemployed people in the country stood at 585,809, an increase of 40,498 on December. Numbers often increase substantially between December and January due to end-of-year layoffs.

Recent figures from Germany could, however, translate into a more positive outlook in the Czech Republic. The Bundesbank, Germany's central bank, predicted in its monthly report for February that Europe's largest economy would return to growth in the first quarter of this year, after slipping into a contraction in the final three months of 2012.

Saying the first quarter would likely yield "a plus in economic output" in Germany, the bank's report said that, as the year continued, the economy would "pick up gradually." Given that bilateral Czech-German trade was valued at 63 billion euros in 2011, an upturn in Germany could offer hope to the Czech Republic.

"It's positive that our main trading partner, Germany, shows increases in economic activity. The leading indicators for Germany almost reached a one-year high, so I think that could be one of the positive factors for this year's outlook for the Czech economy," Petr Sklenář, chief economist at J&T Banka, told The Prague Post.

He also said the negative effect of austerity measures on domestic demand could "gradually diminish," although the decline in real wages would act against improvements in household demand.

In the Czech Republic, the mood could already be starting to improve, as a Czech Statistical Office survey for February found both business and consumer confidence improved on January, with the overall confidence measure up 1.6 percentage points. Reports indicate Prime Minister Petr Nečas' government may scale back austerity measures in 2014 to promote growth ahead of elections that year. The EC suggests the Czech budget deficit will reach 3.1 percent of GDP this year, slightly above the 3 percent target, although the Finance Ministry expects the deficit to be 2.9 percent.

Improvements in German demand are not likely to have an immediate impact on the Czech Republic, suggested Arnošt Marks, a consultant and former director general of EU funds in the Regional Development Ministry.

"Most of the things depend on the demand on the German side. … If that's slightly reviving, it will probably bring some positive impact in the Czech economy but … it will come only by the end of the year," he told The Prague Post. "The question is whether other negative things will not actually be stronger than the upswing in the German demand."

It is a concern that the "several dozens of billions of crowns" of EU structural funds, designed to help the bloc's poorer members, are not stimulating growth.

"If it wasn't for this cash flow, how bad would the growth figures have been?" Marks said. "I see a lot of tendencies for negative numbers in the regions and everywhere else."

Daniel Bardsley can be reached at
business@praguepost.com