New figures suggest return to slowdown, but economy on path to recovery, says analyst

Foto ilustrativa: Barbora Kmentová

There was some relief a few months back when, after its longest recession ever, the Czech economy finally registered growth. However, hopes that a corner had been turned may have been a little over optimistic; preliminary figures released on Thursday suggest that the third quarter saw a fresh GDP contraction of 0.5 percent.

Photo: Barbora Kmentová
To discuss the reasons, and the outlook for the next couple of years, I spoke to economist Vilém Semerák from think tank the Institute for Democracy & Economic Analysis.

“Frankly, we are still not quite sure. Quite a few people suspect that there could be some statistical issues – let’s say, some miscalculation of agricultural results or some similar effect.

“Because when you look at industrial production, which is a very important sector in the Czech economy, the numbers for September were very positive, with an increase in new orders of some 16 percent year on year.

“So right now there are several possibilities. One could be that results for the second quarter were exaggerated, a bit too optimistic, so there will be some redistribution of results between the second and third quarters.

“Another possibility is that maybe some of those other leading indicators that we were following – like business confidence indicators, industrial production, exports – were somehow misrepresented.

“A third possibility is that maybe because of changes in price levels and prices there could be some reserves in the conversion to real numbers.

“In short, it seems still that the Czech Republic is on the path to recovery. Many people see this as a kind of one-off blip, or one-off deviation, that will have to be confirmed.”

Just last week the central bank intervened to weaken the crown. When will we begin to see that move impacting on GDP growth?

Vilém Semerák,  photo: Filip Jandourek
“I’m not so sure about GDP. We will first see it affecting the growth of consumer prices. With respect to GDP, what will matter most will be the response of the public and the effect on exporters.

“The problem with Czech exports is that they are a bit specific; as we are a very small country, we tend to be very import-dependent, so plenty of our exports have a very high share of imported inputs, which dramatically reduces the effects of depreciation on the profits of exporters.

“Then with consumers there is a similar problem. Our consumers have been subject to quite a few price shocks related to VAT changes.

“And what will matter most is how they evaluate the durability of the price shock related to the depreciated currency.

“If they presume that the Czech National Bank will not persist and that the Czech crown will appreciate again fairly soon, they can simply decide to postpone some consumption expenditures.

“So we are not quite sure, although in general it seems that most economists assume that GDP may grow a little bit faster, by a few tenths of a percent, possibly in the first quarter of 2014.”

Assuming the country is more or less on the path back to growth, what level of growth can we expect in the next couple of years? How will it compare to the years before the economic crisis?

Photo: Klára Stejskalová
“We are not quite sure about the exact rate of growth. Estimates for 2013 until today, before the new data were published, were somewhere between minus 0.9 and minus 1.1.

“That means even with a strong second quarter we are rather sure that the economy will remain in the red for the whole year.

“And for 2014, if the path to recovery is confirmed, we expect moderate growth, something like 1.9, possibly 2.0 percent.”