Czech economy set for moderate recovery in 2013, says economist Jan Bureš

Economically speaking, the year 2012 was a difficult one for the Czechs. The country’s economy, heavily dependent on exports to the eurozone, is according to most estimates set for a contraction of around one percent. Wavering demand from the euro area along with weak and fading domestic spending are considered the main reasons behind the decline, not helped by the government’s austerity and tax hikes. In 2013, the eurozone is generally expected to return to moderate growth – but will this be enough to revive the Czech economy as well? That’s a question for Jan Bureš, the chief economist for Era Poštovní spořitelna, part of the Belgian KBC group.

Jan Bureš|Photo: Tomáš Adamec, Czech Radio

“In 2013, I expect the Czech economy to remain in recession, at least in the first half of the year, and in the second quarter, in the middle of the year, I expect the recession to bottom out. It should be primarily driven by the growth of those sectors exposed to the eurozone because I expect certain bottoming-out on the eurozone market and in the global economy. Then, I also expect some slower recovery of the domestic consumption.

“We had a very bad year for domestic consumption in 2012 which went through a very drastic drop, the steepest since the mid 1990s. But I don’t think this will continue; although I see a certain rise in the unemployment rate, I don’t expect domestic consumption to fall continuously by such drastic rates as in 2012. So certain stabilization of domestic demand should help the economy in the second half of the year. But overall, we should see zero growth in 2013.”

Before we get to the issue of domestic demand, let’s talk about the eurozone and the Czech attitude to it. How important will it be for the Czech economy whether the eurozone will find some lasting solution to its problems?

“It’s crucially important for all small and open economies such as the Czech economy although looking at the year 2012, we really had problems mainly with domestic consumption and domestic investment. But part of that problem can be seen from the global perspective as, I would say, a lack of confidence in the profitability of longer-term investments. And I believe that here, an improvement can come if the eurozone finds a longer-term solution to its problems.

Photo: archive of ČRo 7 - Radio Prague

“If this is the case, Czech companies may see more stable foreign orders, a more stable foreign environment. Under these circumstances, the export-oriented sector – which seems very healthy when you look at its fundaments – could be willing to hire more people, and we could therefore also see an improvement in domestic consumption. So there is I believe an indirect but very important link between how the eurozone is able to tackle its problems, and the state of our economy.”

The bulk of Czech exports go to the eurozone, and most of it to Germany. But Chancellor Angela Merkel has warned Germans that 2013 would be “even more difficult”. Do you see a realistic chance that the eurozone’s demands for Czech products will revive this year?

“Well, there are two good things: one is that we are quite competitive in cost-versus-quality terms, and the other is that we are mainly exposed to countries which are not going through such serious problems, that is Germany and to central and eastern Europe. So I think that even if there is certain stabilization in the eurozone and if the periphery suffers, we can still profit from an upturn in German demand, and that can be enough for Czech exports. I realistically believe that the second half of 2013 can be better if the eurozone is able to avert the most dramatic crisis scenarios.

Coming back to the weak Czech domestic demand: can the government do anything to boost the confidence of Czech households?

Photo: archive of ČRo 7 - Radio Prague

“The government has chosen to implement quite severe austerity measures in 2011 and 2012, and there are several others planned for this year, too. We decided to lower our budget deficit at a mach faster pace than for example Poland. It has its longer- and mid-term benefits but it comes with short-term pain. One could argue against some specific measures; I for instance miss more systemic measures in the fields of pension and health care where several things could have been done better. But the point is that the government has chosen this way to go about fiscal tightening which means you can hardly avoid negative effects on domestic consumption.

“So it was a political choice and I respect that; I would criticize the government for a lack of more serious, pronounced reforms. But overall, I think the government should get credit for how it stuck to its original plan. That’s something extremely important on the markets during a period of turbulence, that you have a government which pursues its plans and set targets. Because of that, the Czech government can have one of the lowest yields on government bonds in Europe these days.”

So why do you expect domestic demand to be revived this year? You mentioned its relation to a expected growth in the eurozone but what other positive influences can there be this year?

“Unfortunately, there are not going to be not many factors that would help boost domestic consumption. I do not expect much improvement in the confidence of households, just its stabilization. When you look at 2011 and 2012, we saw that many households were postponing certain expenditures on durable goods, and I believe they cannot do that forever. So that’s going to be one of the things that should help the bottoming-out process.

“Nevertheless, I’m not overly optimistic about 2013. You have to take into account that the unemployment rate is going to rise, not dramatically but still, and the real wage is not going to change very much and is going to stay on the same level or even decline in some sectors for the second year in a row. So I definitely don’t see much space for increased spending; rather for stabilization in the middle of the year.”

What do you expect to happen by the middle of the year? What will bring about the change?

Photo: archive of ČRo 7 - Radio Prague

“The process of bottoming out is going to consist of several things that together will help revive the economy. First of all, I already mentioned that you cannot postpone certain expenditures forever. Second, I believe that companies are going to start hiring at the end of 2013, albeit slowly and cautiously because the volatility they saw in both foreign and domestic orders is going to stabilize. And third, the Czech government is going to relax its austerity measures in the second half of the year which should help. The Czech National Bank is trying hard to keep the monetary conditions extremely relaxed so that for most households and companies, money should remain relatively very cheap.

“When you put this all together, this should help the economy to bottom out. I don’t want to sound too optimistic but I just believe that we are not going to see any deep downturn of the Czech economy this year.”