Higher government spending key for economic recovery in 2014, says ERA’s Jan Bureš

Despite predictions that the Czech economy would emerge out of its longest recession on record in the second half of 2013, the recovery has so far been only sluggish. Third quarter figures have even suggested the chances of another dip. But Jan Bureš, the chief economist for Era Poštovní spořitelna, believes the recovery is tangible and based on stabilized domestic demand and increasing exports. The emerging coalition’s pledge to increase public investment will be a key factor behind the return to growth in 2014, according to Mr. Bureš.

Jan Bureš|Photo: Tomáš Adamec, Czech Radio

“Looking at the more detailed structure of gross domestic product in the third quarter, I think the bottoming-out is still going out. I think it was only a minor dip and one that was not driven so much by the most important part of the economy which is domestic consumption.

“Domestic consumption is fortunately stabilizing, and when you beyond the GDP figures, such as the purchasing managers index which looks very optimistic, I think the recovery is ongoing and I expect a mild growth in the fourth quarter and a higher growth in 2014.”

So the major driving force here is domestic demand rather then the industry which drew in two months in a row?

“Fortunately, the export-oriented industry has been doing very well for a long time now. Over the last two years with some short breaks, the exporters have been doing well. That’s why analysts like me focus on domestic demand which caused the longest recession in Czech history.

“We saw a surprisingly sharp drop in domestic consumption in 2012, and a very sharp in 2012, and also a very sharp drop in investment activity, especially in the construction sector.”

“That’s why the stabilization of domestic demand – we are seeing the stabilization of domestic consumption, not yet in investment – is important the bottoming-out process.”

“When speaking of stabilizing domestic consumption, it’s important to add there is no evidence of any sharp acceleration. But the sole fact it is not falling is important for the Czech economy now because the export industry can much more easily offset the negative trends in the domestic demand we have seen over the last two years.”

What effect do you expect will the Czech central bank’s interventions to weaken the crown have? Some critics say they will increase the prices of imported goods – could the move curb domestic consumption?

Photo: Khalil Baalbaki

“I don’t think it will have a major impact on the economy. On the one hand, the Czech National Bank says it’s going to positively affect the economy via faster consumption expenditures and a better performance by the exporters who are then going to create jobs and increase wages.

“On the other hand, skeptics say it will hurt demand because higher prices will decrease real wages and eventually hurt consumption. These are the two extreme views but my position is somewhere in the centre. I think the growth this year will reach around 1.5 percent while central bank predicts a growth above 2 percent.”

One of the issues of the economy is unemployment which has grown slightly to 8 percent. Will the currency interventions lower the number of unemployed people as the central banks expects?

“I think the unemployment rate will stabilize during 2014 and the interventions are not going to change much about that. The process will be more or less natural.

“More important than the monetary policy is perhaps a shift in the fiscal policy. We have avoided fiscal restrictions and the budget for this year is slightly more expansionary. We’ll see if there is more investment which could bring more positive effects for the labour market than the entire currency interventions.”

What do you expect from the emerging Czech government which is likely to be soon appointed, and its economic policies?

“I don’t have a strong opinion on what we can expect from the new government. The coalition agreement is not very specific about several important issues.

“We know for instance we are set to get a civil service act which is really important, perhaps not for 2014 but in the mid-term perspective, it’s something that we miss. The crucial question is, though, what the legislation will look like and whether it will help increase the administration’s efficiency.

“But that’s just one thing; we are not sure about the details of several other measures including taxes; there are some general aims in the agreement but we don’t know if they will introduce a sector tax or not. We are not sure whether progressive taxation will be introduced, so there are many open questions.”

Photo: Hafiz343, CC BY-SA 3.0

“In general, I think that what we can expect is a slightly more expansionary fiscal policy; judging from a pure cyclical point of view, I think it’s a correct approach because in the last three years, the investment as part of the state budget was declining, so there is room for an increase.”

And finally, the Czech Republic is one of the countries which put a lot of emphasis on export-driven recovery and economic diplomacy. Can this provide a boost for the economy?

“What is important now is the recovery in domestic demand which the government can help by normalizing its investment budget. Supporting exports is not a major problem. Exporters are doing pretty well on their own.

“As far as economic diplomacy goes, it is not a game-changer. It’s not like we don’t have anything like that already, and it’s not something that could help us grow much faster.

“There are more important things such as the civil service act and the efficiency of the government where I believe huge savings can be found and the resources could be used more efficiently, for instance to decrease the quite high taxation of labour.

“These kinds of measures would help increase the overall competitiveness of the economy much more, and eventually also help exporters. That’s more important than improving our economic diplomacy.”