Czech economy out of longest recession on record
The latest figures suggest that the longest recession in modern Czech history is over. The Czech Statistical Office reported the country’s gross domestic product increased by 0.7 percent in the second quarter of this year. If confirmed, the Czech economy would have grown for the first time in 18 months. The growth has been very fragile and fuelled mainly by exports while domestic spending remains depressed – but can exports provide a base for sustainable growth? And what can the caretaker Czech government do to boost the recovery? In this edition of Marketplace, I discuss these and other issues with former Civic Democrat finance minister Ivan Pilip and a leading left-leaning economist Ilona Švihlíková.
Ivan Pilip: “We should definitely be quite cautious because the Czech Statistical Office often changes these preliminary estimates few months later. But looking at other signals from the economy, I think the worst is over. That doesn’t mean that difficult times are over but these are the first signals of an improvement and perhaps of the fact that the first phase of the crisis is over. But this is not a confirmation of a turnaround of the economy.”
The recovery has been driven by exports, mainly to Germany. Can this be a solid base for sustainable growth, given the fact that Czech domestic demand is still depressed?
Ivan Pilip: “It certainly can. I think the gravest mistake of the previous government of Mr Nečas was to pretend that developments in the eurozone are not that important for the Czech Republic, and that the Czech Republic can pursue some kind of special policies that don’t take into account the issues of the eurozone and of the euro as a currency. Export is really crucial and improvement in the eurozone, and above all in France which came as a surprise – can be a good signal for a long term growth of exports.
“As for the domestic consumption, I’m rather pessimistic about the next few quarters but if there are signals that the economy is improving, it could change the psychology of the households; this is one of the most important reasons why people prefer saving rather that spending at the moment.”
Some industry associations have been also very cautious about the latest data and say that Czech firms remain very careful when it comes to hiring and creating new jobs. Ms Švhihlíková, how big do you think is the risk the economy could plunge into recession once again?
“Other components may play a psychological role and have some influence but I think the domestic depression is quite deep, and it’s not only households’ concerns that are fuelling it. We can also look at the development of investment with is definitely connected to the decline in real wages; we can see similar development in the public sector. There are also issues with a growth momentum which I think is absent in the Czech Republic right now – but that can of course change with a new government.
“And I also think it’s not very positive for a developed economy to grow only through exports; that is mostly a strategy employed by countries that are in the catch-up phase but not by stabilized economies.”
Speaking of internal issues of the Czech economy and the role of the government – what do you think the interim government of Jiří Rusnok can do to boost the recovery? We don’t know how long it will remain in power but can it speed up the recovery?
Ivan Pilip: “That very much depends on the time they have to carry out their policies. As you said, we don’t know when the next election will take place; in case they are held at the end of October, this government can only change a few things.
In other words, you think that regardless of what the Rusnok government’s policies are, their influence will be limited.
Ivan Pilip: “I think it will be very weak. What the Rusnok government is about to do now is to send some signals for the elections. I mean, they are part of a left-wing bloc of parties – the president’s group, the Social Democrats, the Communists – and the government’s steps will be above all led by their efforts to reach their voters and maybe make some short-term improvements – for instance, the increase of minimal wage and so on. But they cannot substantially change the economy. This could only happen after the elections.”
One of the government’s biggest tasks has been getting the state budget for 2013 ready. What do you think the major risks are that could come in this situation?
Ivan Pilip: “The government has very little room to manoeuvre. A big part of the budget has already been put together at the Finance Ministry because the general data are there by the end of the summer. So it’s difficult to change the budget. Another important thing is that the government is facing a very big dilemma of European economic policy in recent years: how to support growth by government spending without putting the country’s fiscal stability at risk. I don’t quite understand how they want to do this without exceeding the deficit target that had been set at around 3 percent of GDP.”
That might be the crucial issue of the interim government’s policy. How do you think it’s possible for the budget to allow for investment while keeping the deficit at the 3-percent level?
“Whatever government comes after the early elections, one of its tasks will be to increase the fiscal capacity of the state and to have a very careful look at possible tax hikes, especially in VAT. Another problem will be rent-seeking which grew quite a lot under the previous government of Petr Nečas.”