Czech economy contracts for third consecutive quarter

The Czech economy remains in recession. According to preliminary figures released by the Czech Statistical Office on Tuesday, the gross domestic product fell by 0.2 percent in the second quarter of this year, and the economy contracted by 1.2 percent compared to the same period last year. Exports are still the main driving force but slowing industrial output and depressed domestic demand continue to undermine economic growth. Radio Prague discussed the latest figures with economist David Marek from the consultancy Patria Finance.

“The main problem of the Czech economy is quite easy to spot: domestic factors are to blame for the mild but lengthy recession. Household consumption remains depressed as real disposal income declines. The government eased its consolidation efforts but it cannot afford to provide any significant fiscal stimulus; the falling construction output suggests a weak investment activity. The only positive point is net exports which improved in the second quarter; however, they are too weak to outweigh the negative impact of the domestic factors.”

The rising exports show that the Czech economy is driven by the economies of neighbouring countries and major Czech trading partners – all of whom are doing better and their economies are growing. So why is the Czech economy in recession while theirs are not?

David Marek

“That’s a good question because it’s difficult to indentify the reasons why Czech household and companies are somehow so sceptical and cautious that they cut their spending, driving the economy into recession. The thing is that these domestic factors could be accompanied by the worsening global economic situation. We have some indications that exports in the fourth quarter could be worse than in the first half of the year, so now the last strong feature of the Czech economy could be weakening and we could see a longer recession that we though.”

Some of your colleagues blame the recession on the government and its decision to increase the VAT rates this year. Do you agree with the argument that this undermined spending and therefore the economic growth?

“Fiscal policy definitely has had some negative effect on the performance of the Czech economy, and the increase of the VAT rate was the most significant change in the fiscal policy this year. But that’s not main reason. I would say that the fiscal policy could have taken away several tenths of a percentage point from the growth but the GDP declined by some 1.2 percent year on year so it’s obvious that main reason lies somewhere else.

Photo: Barbora Kmentová

“But the government knows that now is not a good time for any further tightening of its fiscal policy and its efforts to narrow the gap of public finances are not as hard as they originally were. The government is now letting the deficit to grow slightly higher that projected for this year. Originally, the government aimed at a deficit of 3 percent of GDP but now the Finance Ministry expects the deficit to reach 3.2 or 3.3 percent of GDP.”